Having spent most of July on holiday or away from work, I’ve not been as focused on the stock markets as usual. But with the FTSE 100 index having its best week in several months, it’s time for me to ‘take stock’ of share prices.
The FTSE 100 versus the S&P 500
One thing that jumps out at me is how strongly the Footsie has bounced back from recent lows. On Friday, 7 July, it closed at 7,256.94 points. As I write on Friday afternoon, it stands at 7,665.56, having leapt by almost 410 points (+5.6%) in two weeks.
Over the past fortnight, the US S&P 500 index is up by 3.1%. Thus, the FTSE 100 has beaten the US market over this short period. However, as the following table shows, this bucks the long-established trend of US stock returns thrashing those from UK shares.
| Index | 2023 YTD | One year | Five years |
| FTSE 100 | +2.9% | +5.4% | -0.5% |
| S&P 500 | +18.1% | +13.4% | +60.9% |
Over the past five years, the main US market index is up by more than three-fifths, whereas the Footsie has delivered a small loss. However, these figures exclude cash dividends, which are a much larger component of the long-term returns from owning UK shares.
The S&P 500 looks expensive to me
While it’s sometimes helpful to compare historical returns from various asset classes and markets, this is not an accurate guide to future returns. And right now, US shares look pricey to me, while UK stocks look too cheap.
Today, the S&P 500 trades on a multiple of 20.4 times this year’s anticipated earnings, for a forward earnings yield of 4.9%. This means that its modest dividend yield of under 1.6% a year is covered a healthy 3.2 times by earnings.
Meanwhile, the FTSE 100 is priced at 10.6 times earnings, delivering an earnings yield of 9.4%. What’s more, its much higher dividend yield of around 4.1% a year is covered 2.3 times by earnings.
With US stocks being far more highly rated, this indicates to me that they may be on the pricey side. On the other hand, UK shares look cheap, both in historical and geographical terms.
Which do I buy today?
Thanks to large holdings in US and global tracker funds, my family already has hefty exposure to US stocks. That’s hardly surprising, given that the US accounts for more than two-fifths of the total value of global equities (around $100trn or £78trn).
Conversely, the FTSE 100 is worth around £1.9trn, which is roughly 2.5% of global market capitalisation. Over the past year or so, my wife and I have increased our exposure to our home stock market to a multiple of this weighting. Hence, we also have significant exposure to UK shares.
Lastly, US mega-billionaire Warren Buffett has repeatedly warned, “never bet against America” — and I’d hate to ignore my investing hero’s advice. Therefore, I will hedge my bets by adding to both our UK and US holdings over time — for income and growth, respectively. And I’m quite comfortable with sitting on this particular fence!
