Not many investors discuss valuations during periods of speculation and momentum-chasing, but they matter. The U.S. stock market continues to lead the world in how much you pay for each dollar of earnings. Meanwhile, you pay significantly less overseas.

U.S. stocks currently trade at a forward P/E of approximately 22x, meaning you’re paying $22 for every $1 in expected earnings over the next 12 months. This translates to an earnings yield of 4.5%, in line with the 10-year U.S. Treasury bond yield. Compare this to global markets: excluding the U.S., you pay about 14x for $1 in earnings, and emerging markets are even cheaper at 12x.

Within the U.S., sector valuations vary widely. Information technology and consumer discretionary lead at 27x, driven by AI and growth optimism. Healthcare and energy are on the other end at 16x and 14x.

What stands out? The U.S. remains highly valued, not just compared to global markets but also against its own historical average (S&P 500 long-term P/E ~15–16x). The Buffett Indicator (total U.S. market cap divided by GDP) is now at ~200% (see my Buffett post from last month).

Valuations are not a great short-term market timing tool but are important for long-term returns. High P/E ratios often precede much lower 10-year returns. Goldman, from late 2024, projects an annualized return of just 3% for the S&P 500 through 2034, with a range of -1% to 7%. This is significantly lower than the historical average.

U.S. markets are dramatically underperforming relative to global peers in 2025. It begs the question: Are valuations starting to matter? Advisors and investors often suffer from home bias, overweighting their own country’s stocks and overlooking diversification into global markets.

Focusing on macro drivers like valuations and embracing a global market perspective may prove far more significant than chasing the next hot stock.