Historically, US earnings outgrew the world by 1%. Post-GFC, this widened to 3%. Investors have extrapolated this recent, higher rate as the new normal, pushing the US CAPE ratio to nearly double that of non-US markets. This represents a historically extreme valuation based on a potentially temporary growth advantage.

The P/E ratio, like a Mercator map, simplifies a complex reality for easier navigation. However, it severely distorts underlying truths like business quality, reinvestment needs, and duration. The real mistake is forgetting these distortions and treating the simplified metric as objective truth.

The UK market is characterized by cheap valuations, poor corporate governance, and low insider ownership. These factors often trap value investors, with private equity takeovers being the primary catalyst for realizing returns, as organic market mechanisms fail to correct undervaluation.

In 2025, US stocks underperformed global peers despite superior earnings growth. Non-US markets saw significant price increases on flat or negative earnings, a divergence that Goldman Sachs Wealth Management believes is unsustainable, reinforcing their long-term US overweight thesis based on earnings fundamentals.

Different valuation models tell conflicting stories about the US market. The Shiller CAPE ratio suggests extreme overvaluation near dot-com bubble highs. However, a reverse DCF model calculating the implied equity risk premium shows the market is only moderately valued, creating a confusing picture for investors.

Contrary to popular belief, the underlying business fundamentals (sales, profits) of value and growth indexes have grown at nearly the same rate this century. The vast performance gap is not due to better business results but rather investors' willingness to pay increasingly higher multiples for growth stocks.

Many non-US companies are growing as fast as the Magnificent 7, offer significantly higher dividend yields (7-8x), and trade at a 30-50% valuation discount. This represents a rare cost-benefit opportunity that investors, who typically apply such analysis to every other purchase, ignore in the stock market.

For the first time in a decade, European equities have broken out of their long-term trend of a widening valuation discount versus the US. Historically, such breakouts signal the beginning of a sustained, multi-year period where this valuation gap narrows significantly from its current 23%.

Across 200 years and 56 countries, the single most important factor for long-term investing success is the starting valuation. Buying portfolios with low P/E ratios or high dividend yields consistently outperforms buying expensive assets by 3-4% annually over the long run.