As suddenly and as sharply as the U.S. equity bear market began, so it ended. The rebound from the late-March lows was so quick and strong that it capped the shortest bear market in history (1 month) and marked the fastest round trip back to all-time highs (181 days). With such a rapid retracement, investors are left wondering: are equities expensive? 

At the surface, the answer is yes: U.S. equities went from trading at valuations that were near one standard deviation cheap to over one standard deviation expensive relative to its 25-year average. However, the reality is that the answer to this question depends very much on where in the global equity market we look. 

Beneath the surface, we have seen an incredibly uneven equity market recovery, with stark differences by sector, style and region. Given the constraints we are still facing in our normal lives, the market recovery has been led by sectors where consumers and businesses are able to spend: technology, communication services, and online retail – sectors that have a greater weighting in the growth style. On the other extreme, some sectors still remain in bear market territory, like airlines, energy, and banks – sectors that have a greater weighting in the value style.

Globally, this dispersion in sector and style performance has also played out. It is no surprise then that we have seen large regional differences in performance this year based on each region’s sector representation. U.S. equities and EM Asia equities have led, recouping over 100% of their COVID-related losses – regions in which the leading sectors have a greater weighting. Other regions, like Europe, Japan, Latin America and EMEA have lagged, recouping about 65% of their losses (very similar to U.S. value) – given their heavier weighting towards value sectors. 

As a result, a historic valuation gap has emerged between U.S. and international equities: EM equities are now one standard deviation cheap relative to the U.S. as seen in the chart below. A similar story exists for developed international equities which are more than one standard deviation cheap relative to the U.S. While we may be living in the COVID-world a bit longer, we will eventually emerge from it once a vaccine is distributed. Once we get greater visibility around this timing, the value style and international equities stand to benefit the most. Investors have the chance now to rebalance portfolios for a post-pandemic recovery – at very attractive valuations.

International equity valuations are historically cheap relative to the U.S.

Emerging markets: Relative price-to-book ratio

MSCI Emerging Markets vs. S&P 500, last 12 months

Source: FactSet, MSCI, Standard & Poor's, J.P. Morgan Asset Management. Data are as of September 15th, 2020.