Valuation Expansion Without End: Global Equity Sectors Reach Historic Valuations

Executive Summary

Global equity markets are showing broad upward momentum despite significant geopolitical risks, yet this movement has increasingly decoupled from corporate earnings. A current valuation analysis reveals that more and more equity sectors and industry groups are valued at unusually high levels – particularly Industry, Technology, and Communication Services. While some defensive sectors such as Energy and Consumer Staples still appear relatively attractive, the valuation situation is becoming increasingly challenging for further price gains. Europe still benefits from lower valuations, but this advantage is continuously shrinking.

People

• Sandro Rosa
• Daniel Haase
• Beata Manthey
• Donald Trump
• Ronald-Peter Stöferle

Topics

• Equity valuations and percentile ranks
• Geopolitical risks and market dynamics
• Sector performance and industry groups
• Technology and AI investments
• Regional valuation differences

Detailed Summary

The Paradoxical Market Situation

Despite significant geopolitical turbulence – from the removal of Venezuelan dictator Nicolás Maduro to protests in Iran and Donald Trump's claim to Greenland – global equity markets demonstrate remarkable resilience. According to asset manager Daniel Haase, paradoxically, increased uncertainty itself could be a driver of rising stock prices, particularly if currency devaluation is perceived as a growing risk.

However, a critical divergence is evident: Corporate earnings have not kept pace with substantial share price advances across the board, leading to broadly higher valuations. Beata Manthey from Citigroup warns that high valuations leave little room for error and pose downside risk should companies fail to meet earnings guidance.

Valuation Methodology and Results

The Market analyzes the valuations of eleven global equity sectors and 25 industry groups using five valuation metrics:

• Dividend yield
• Shiller price-to-earnings ratio
• Forward price-to-earnings ratio
• Price-to-sales ratio
• Price-to-book ratio

Through the percentile rank approach, each industry is compared with its own historical performance. A high percentile rank (closer to 100) signals an unattractive, expensive valuation.

The New Leader: Industrials

The Industrials sector has taken the top spot among the most expensive sectors with a percentile rank of 99. Industrial stocks recently gained around 10% – driven by several factors:

Geopolitical Factors: The new "world disorder," in which international rules are increasingly being replaced by the law of the strongest, particularly boosts the defense sector (Aerospace and Defense), which accounted for 22.3% of MSCI Industrials at the end of December.

Infrastructure Investments: The investment boom for data centers drives companies like Schneider Electric, ABB, and Eaton, which supply cooling products, generators, and transformers.

Political Impulses: The One Big Beautiful Bill Act in the United States is intended to provide tax incentives for investments; Germany's financial package also offers positive tailwinds.

However, there is a risk that stock prices have already priced in numerous positive developments and carry downside disappointment potential.

Technology and Communication: Slowing AI Dynamics

Technology (98th percentile) and Communication Services (98th percentile) remain extremely expensive valuations. The AI trade has recently lost momentum, which is technically welcome.

Divergence within the Tech Sector: While companies like Oracle, which are overstretching their balance sheets, have been recently punished, stronger players like Alphabet are showing new strength.

Massive Investments with Risks: Alphabet, Amazon, CoreWeave, Meta Platforms, Microsoft, and Oracle are expected to increase their capital expenditures again in 2026, exceeding the $500 billion mark. This arms race consumes free cash flow, resulting in fewer share buybacks.

High Earnings Expectations Under Pressure: US IT companies are expected to increase earnings per share by 30% in 2026, with the S&P 500 rising by approximately 15%. Given high expectations, there is no room for disappointment – especially as Nvidia (20.2%), Microsoft (15.2%), and Apple (18%) account for more than half of technology market capitalization.

Energy: Comparatively Attractive, but Volatile

The Energy sector, with a percentile rank of 65, is the cheapest global sector and appears relatively fairly valued.

Venezuela and Geopolitical Opportunities: With the removal of Nicolás Maduro, the United States has secured influence over the Venezuelan oil industry. The hope is that energy infrastructure will be modernized and the country will export more oil, which could lower commodity prices and inflation pressure in the US. However, costs are immense and the environment uncertain – currently, there is global oversupply.

Iran Risks: Unrest in Iran and fears of regional escalation have recently driven higher oil prices. A scenario with Iranian attacks on US bases or regional shipping would be devastating and would push oil prices higher.

Inflation Signal: Daniel Haase observes that inflation-sensitive sectors have been in strong demand for weeks – a signal that the market is expecting more inflation. The Oil and Gas Services and Equipment subsector has broken out from its sideways movement to the upside.

Historical Dimension: The Energy sector accounted for approximately 16% of the S&P 500 twenty years ago, today less than 3%, which points to substantial upside potential.

Consumer Staples: Unpopular, but Not Expensive

The Consumer Staples sector showed the second-worst performance in 2025 and suffers from persistently weak demand, particularly in the United States. Many consumers are "trading down" – switching from brand-name products to cheaper private label alternatives. However, these challenges are already priced in, so valuations appear comparatively reasonable.

Opportunities from Sentiment Shifts: A cautious improvement in US consumer sentiment could significantly improve the environment. Should AI euphoria cool, defensive consumer staples stocks should be in demand again.

Healthcare: Spectacular Comeback

The Healthcare sector has staged an impressive comeback: with a gain of approximately 17%, it delivered the best performance of all sectors since September 2025. The valuation score rose from 50 to 75 – a clear jump, but not an acute warning signal.

Easing of Uncertainties: Pressure on drug prices in the United States has eased – Trump's administration reached an agreement with pharmaceutical companies on tariff reductions in exchange for more moderate price cuts, bringing planning certainty back.

Long-Term Growth Potential: An aging population worldwide, new opportunities through AI applications in medicine, solid balance sheets, and defensive qualities continue to offer opportunities.

Regional Differences: Europe's Advantage Shrinks

While Europe traditionally enjoys lower valuations, this gap is closing:

Consumer Staples: US sector at 90th percentile vs. Europe 23rd percentile. Walmart trades at P/E 46 and 0.8% dividend yield, while Nestlé offers P/E 19 and 4% dividend yield.

Other Differences: In cyclical consumer (73% vs. 94%), energy (45% vs. 65%), and financials (83% vs. 94%) percentiles, Europe fares favorably.

Trend: However, these differences are continuously narrowing. The real estate sector is now more expensive on the old continent than in the US (50th vs. 30th percentile).

Key Takeaways

• Equity valuations are unusually high across the board; the Industrials sector (99th percentile) is now the most expensive, followed by Technology and Communication Services (each 98th percentile)

• Geopolitical uncertainty (Greenland claims, Venezuela, Iran) paradoxically fuels markets and particularly drives defense and infrastructure investments

• Massive capital expenditures in the tech sector (expected to exceed $500 billion) consume free cash flow and carry the risk that earnings expectations (+30% expected) will be missed

• Energy remains comparatively attractive (65th percentile), benefiting from inflation expectations and geopolitical risks – but also from uncertainties in Venezuela

• The Healthcare sector delivered a spectacular comeback (+17%), with eased price pressure in the US and long-term growth potential

• European valuations remain cheaper than in the US, but the advantage is continuously shrinking

• Defensive sectors such as Consumer Staples benefit from low expectations and could become attractive again on sentiment shifts

Metadata