Why US Stocks Are Overpriced

The following is a transcript of the podcast. Listen Here

P/E Ratios & Diversification

Hello, my friends and clients. Welcome back to Five Minutes with Leanne. Today, we are going to go down memory lane just a little bit.

I want you to remember the time, the time, whenever that was, that you came and you first asked me to manage your money or started to ask me questions about how we should invest. And you might remember me saying that there were three very important rules about investing in this office. The first rule is that we wanna own shares in profitable companies, number one.

Number two, we wanna own those shares as inexpensively as we can. In other words, don't overpay for our shares in those profitable companies. And number three is that we want to give as little of our earnings back to the IRS as possible.

So quick recap, three rules of investing in my office. Number one, we own profitable companies. Number two, we own them as inexpensively as we can.

Number three, we give as little as possible to the IRS when we are profitable. Okay, so we're gonna be focusing today on number two. How is it that we can own shares in profitable companies as inexpensively as possible? That's a nice cheeky way of saying something, right? But I actually wanna break it down so you understand what I'm thinking and what I'm doing with your money when you entrust it to me to get it invested.

So we're gonna be unpacking today something called a P-E ratio. Don't turn me off, hang in there with me for just a couple minutes because this is going to show you the thing behind the thing. Are you ready? Here we go.

All right, so a P-E ratio is essentially a price to earnings ratio. In English, that is what you pay to buy the share divided by what the company actually earns. So let's think of it like a rental property.

We can all think of this, right? So if you're buying a rental property and you spend $200,000 to buy a rental property and then that property generates $10,000 a year in rent, that basically means that you have a 20 times multiple. And it's basically the same idea with stocks. We're not doing bonds today, we're doing stocks.

So what is a reasonable P-E ratio? Well, as everything is, context is everything. So historically, the sweet spot for a P-E ratio for a US company is 15 to 18X. That's kind of the Goldilocks zone for most markets.

So think about Coca-Cola, typically trading at 17X or Johnson & Johnson at 16X. Not too hot, not too cold, just right. But context is king.

So Apple at one point was at 25X. Now, when Apple was revolutionizing tech, it made sense. But if we wanted to buy shares in Walmart and their P-E ratio was 25X, we'd be like, what? You're kidding me, right? That's a super expensive P-E ratio for a grocery giant, right? So the reality check of where we are today in June, 2025 is that US stocks are at 21.4X versus our historical average of 16.2. In English, please, I'll save us, save us all.

What does this mean in English? It means that when we're investing or buying shares in US companies, we're paying a premium in the price right now, which means that we need to be diversified. And that's the whole point of this. I want you to understand that when we are investing or when I'm managing your money and you wanna just invest in something, it isn't just a matter of saying, okay, I'll just go buy the whole S&P 500 for you and call it good.

That would be a horrible idea. This is why diversification is so important. So typically what happens is when we see our P-E ratios of US stocks being kind of real expensive, then we look for opportunities elsewhere.

And then elsewhere is internationals, like international opportunities. So the opportunities to buy stock in international companies right now is sitting with emerging markets are at like 12.1X. So I'd like you to think about Nestle or Samsung, these companies that we know and we put our hands on their products. We can actually get those stocks at a discount compared to their United States peers.

So when the US markets get frothy, our international ATFs provide more stability. And when we have those lower P-E ratios, that's basically your money buying quality at discount prices. This matters.

It matters in your ROI. It matters in your diversification strategy. In managing risk, it just matters.

Those lower P-Es mean more room for your returns to potentially expand as companies grow and become more profitable. And when we're in an environment like this where there's political chaos and there's been market swings, your diversified ETF strategy doesn't panic. It adapts.

We're not betting on one country's politics or one market's mood swings. We are diversified, truly diversified.