Valuation metrics are flashing their strongest warning signals yet for U.S. stocks, while non-U.S. equities look far more attractive by comparison.
It’s difficult to imagine a more bearish message from valuation indicators than the one currently facing the U.S. stock market.
Non-U.S. stocks have already delivered more than double the return of the S&P 500 this year, and the odds favor that outperformance continuing into 2026. For investors who want to stay invested in equities but are uneasy about the extreme valuations in U.S. markets, that outlook is encouraging. On average, non-U.S. stocks offer significantly better value.
Many U.S. investors may not realize how strong non-U.S. performance has been in 2025, largely because domestic financial coverage has focused almost exclusively on the “Magnificent Seven” and the AI trade. Yet while the S&P 500 has posted a 16.3% total return year to date through Dec. 26, non-U.S. stocks have surged 33.1%, as measured by the MSCI All-Country World ex-U.S. index.
Part of that gap reflects the weaker U.S. dollar, which boosts dollar-based returns for overseas assets. But even setting currency effects aside, non-U.S. equities remain markedly cheaper than their U.S. counterparts. That means they could still outperform in 2026 even if the dollar stabilizes.
The valuation gap is especially clear when comparing cyclically adjusted CAPE ratios, which divide a market’s price level by the past 10 years of inflation-adjusted earnings. This measure, popularized by Yale economist Robert Shiller, has long been used to assess long-term market valuation.
Data from Barclays Indices show that the U.S. CAPE ratio stands above those of roughly two dozen other countries. On average, the CAPE ratios of those markets are only a little more than half the U.S. level.
Overvaluation warnings
The CAPE ratio is just one of 10 valuation indicators I track monthly, each chosen for its statistically significant ability to forecast the S&P 500’s inflation-adjusted returns over the next decade. Today, all 10 are sending the same message: U.S. stocks are extremely overvalued.
In the latest readings, the average overvaluation percentile across these indicators is 98%, meaning the market is more expensive now than at nearly any point in U.S. history. It’s hard to envision a clearer or more unified warning signal.
That leaves investors with a key question: Is it more likely that U.S. stocks will once again defy gravity in 2026 despite extreme valuations, or that far cheaper non-U.S. markets will emerge as the safer — and stronger — bet?
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