The Canadian stock market looks to be at risk of overvaluation, but a new report from Desjardins Group counsels against jumping to conclusions.
With the S&P/TSX index holding up well, even as earnings expectations are in decline, Desjardins reports that the 12‑month forward price-earnings (PE) ratio for the Canadian market is now above 17. This is well above its average level of 14, which has been the case since the end of 2002.
“The price-earnings ratio indicates that the Canadian market could be overvalued, and therefore at risk of correction,” states the report. “However, several factors suggest caution before making such a prognosis.”
For example, Desjardins says the turmoil in the energy sector is having an outsized impact on the PE ratio. Most other sectors have ratios that are in line with their historical averages, it reports. Indeed, some sectors, such as materials and tech, look to be undervalued on that basis, it notes.
Additionally, it reports that other multiples, such as the cyclically-adjusted PE ratio, or the forward price-to-book ratio, do not show that the market is significantly overvalued. Finally, it notes that, while the Canadian stock market has performed well so far this year, it is still lagging the performance of equity markets in other regions, including Europe and China.