As investors around the globe monitor several geopolitical developments, including the debt ceiling deal in the U.S., several stock markets around the globe are undervalued based on Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)’s market indicator concept.
Following passage in the House of Representatives earlier this week, the debt ceiling deal passed in the Senate on Thursday, averting a major U.S. government debt default. The Fiscal Responsibility Act suspends the debt ceiling until Jan. 1, 2025, in which the debt ceiling will then increase based on obligations made during the suspension period.
U.S. market surges on debt ceiling deal, strong jobs report
On the heels of the debt ceiling deal passing Congress, U.S. market indexes climbed more than 1% on Friday: The Dow Jones Industrial Average closed at 33,762.76, up 701.19 points from Thursday’s close of 33,061.57 for its best one-day gain since November 2022. Likewise, the Standard & Poor’s 500 Index increased approximately 1.2% during the day while the Nasdaq Composite Index reached its highest level since April 2022.
U.S. stock indexes also surged on a strong jobs report for May: The Bureau of Labor Statistics reported that total nonfarm payrolls increased 339,000 during May, smashing the Dow Jones estimate of 190,000 jobs added. Nonfarm payrolls increased for the 29th consecutive month, led by job growth in professional and business services, government and health care and leisure and hospitality.
According to the Aggregated Statistics Chart, a Premium feature of GuruFocus, the mean day’s change of the S&P 500 stocks was 1.92% with a median of 1.75%. Among S&P 500 stocks, 464 stocks had positive day’s change, compared to just 36 stocks with negative day’s change.
European and Asian stock markets also increased on debt ceiling deal
Several European stock indexes also gained on Friday, including the Stoxx Europe 600 and the FTSE 100. The Stoxx Europe 600 index closed at $462.22, up 1.53% from the previous close of $455.27.
Likewise, the FTSE 100 index closed at 7,607.28, up 1.56% from the previous close of 7,490.27.
Asian stock markets also gained on Friday, led by the Hang Seng Index’s gain of more than 4%.
Among the Hang Seng Index stocks, the mean day’s change was 4.75% with a median of 4.17%.
Summary of market valuations for the U.S. market
As of Friday, the Wilshire 5000 Full Cap Price Index stood at $42.05 trillion, approximately 1.20 times greater than the sum of gross domestic product of $26.49 trillion and total Federal Reserve Bank assets of $8.43 trillion.
Based on the current market valuation level, the implied return of the U.S. market is approximately 2.9% per year, assuming the valuation reverses to the 20-year median ratio of 95.04%.
The predicted and actual returns chart also considers two alternative cases: an optimistic case in which valuations reverse to 130% of the 20-year median ratio and a pessimistic case in which valuations reverse to just 70% of the 20-year median ratio. Based on this chart, the implied return of the U.S. market ranges between -1.3% per year and 4.90% per year.
Other market valuation measures exist for the U.S. stock market, including Robert Shiller’s cyclically-adjusted price-earnings ratio and the GF Value for the S&P 500.
As of Friday, the Shiller price-earnings ratio of the S&P 500 stood at 30.2, compared to the 20-year low of 13.3 and the 20-year high of 38.6. The current valuation ratio is approximately 15.5% higher than the 20-year median ratio of 26.1.
Based on Shiller’s market valuation, the implied return of the U.S. market is approximately 4% per year assuming that valuations reverse to the 20-year median.
GuruFocus also calculated the GF Value for the S&P 500. Patterned after the Peter Lynch earnings line, the GF Value considers historical price multiples and adds internal adjustments for past performance and future growth estimates. For the S&P 500, the GF Value considers several price multiples of the index, including price-earnings, price-book and price-sales.
As of Friday, the S&P 500 is fairly valued based on its price-to-GF Value ratio of 0.94.
Users can identify undervalued markets around the globe using Buffett’s market indicator concept
GuruFocus’ Global Market Valuation pages apply Buffett’s market indicator concept to more than 25 stock markets around the globe, including European markets, Asian markets and emerging markets. As of Friday, several markets around the globe are undervalued based on the total market cap to gross domestic product ratio, including the Singapore, Spain and U.K. stock markets.
The Singaporean stock market is significantly undervalued based on its market valuation ratio of 74.75%, compared to the 20-year minimum ratio of 54.79% and the 20-year maximum ratio of 177%. Based on this market valuation level, the implied market return of the Singaporean stock market is 13.3% per year assuming that valuations reverse to the 20-year median ratio of 112.02%.
The Spanish stock market is significantly undervalued based on its market valuation ratio of 30.03%, compared to the 20-year minimum ratio of 22.38% and 20-year maximum ratio of 110.25%. Based on this market valuation level, the implied market return of the Spanish stock market is 13.5% per year assuming that valuations reverse to the 20-year median ratio of 55.20%.
The U.K. stock market is modestly undervalued based on its market valuation ratio of 73.68%, compared to the 20-year minimum ratio of 62.23% and the 20-year maximum ratio of 129.30%. Based on this market valuation level, the implied market return of the U.K. stock market is approximately 10% per year assuming that valuations reverse to the 20-year median ratio of 96.94%.
Other emerging markets that are undervalued based on the Buffett Indicator concept include the Pakistani, Egyptian and Brazilian stock markets.
