Investing Ideas

Worried about U.S. stock valuations? Consider the ROE

There’s a wide return on equity gap between U.S. and international stocks and it could persist.

By: Michael Hickey

Updated: 11/17/2023

Key Takeaways

Comparing U.S. stocks to non-U.S. stocks based only on valuation metrics such as price-earnings (PE) multiples ignores the drivers behind the long-term profit advantages of U.S. markets.
Rather than just comparing PE multiples, investment allocators may want to study whether profit advantages in the U.S. are likely to persist.
Return on equity (ROE), one profit measure that reflects on how well companies are run, has tended to be higher for U.S. stocks compared with international stocks.
Reasons the ROE advantage for U.S. stocks may continue include first-mover advantages, more companies in high-margin sectors, pricing power, relative inflation resistance, capital-light structures, scalability, and more frequent share buybacks and dividend increases.

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Worried about U.S. stock valuations? Consider the ROE

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