Wall Street Very Expensive: Time for Europe and China?Shenzhen Component IndexSZSE:399001Swissquote1) The S&P 500 valuation has reached its late 2021 record In the second quarter of 2025, the valuation of the U.S. market, represented by the S&P 500, returned to its record levels of late 2021. The S&P 500 has been reaching new all-time highs consistently since early July. In contrast, European and Chinese markets appear undervalued. In Europe, indices such as the Stoxx 600 and the Eurostoxx 50 remain below their historical highs. There is catch-up potential, especially as valuation remains reasonable. Technically, these markets offer attractive setups. In China, the potential is even more pronounced. Chinese markets are significantly behind, both technically and fundamentally. It would simply be a matter of returning to their former peaks. Although U.S. corporate earnings remain strong, the current valuation of the S&P 500 limits its short-term upside potential. Conversely, Europe—and especially China—offers a more attractive risk/reward profile at this point in the cycle, both in terms of market valuation and technical analysis. While the S&P 500’s long-term trend remains bullish, it may therefore be wise to rebalance slightly in favor of European and Chinese equities. The first chart below shows monthly candlesticks for the flagship Shenzhen stock exchange index. The second chart below shows monthly candlesticks for the EuroStoxx 50 futures contract, with a market that has not yet exceeded its historical high—unlike the S&P 500 index. 2) The Shiller PE (or CAPE Ratio) is the best option to compare U.S., European and Chinese equity market valuations The CAPE ratio (Cyclically Adjusted Price-to-Earnings ratio), also called the Shiller PE, is a financial indicator that measures stock market valuation. It compares the current price of an index, such as the S&P 500, to average inflation-adjusted earnings over the past ten years. Unlike the standard PE ratio based on a single year’s earnings, the CAPE smooths out cyclical fluctuations to provide a more stable, long-term view of valuation. While the Shiller PE of the S&P 500 has returned to its 2021 record, that of the European and especially Chinese equity markets remains well behind. There is therefore still significant catch-up potential for Chinese and European stocks compared to U.S. stocks according to this fundamental valuation metric. The chart below, produced by Barclays Research, shows a comparison of equity market valuations using the CAPE ratio between China, the United States, and Europe. The Warren Buffett indicator, for its part, proposes a valuation comparison using the ratio of market capitalization to GDP. Here too, the message is clear: the Chinese equity market is significantly cheaper than the U.S. equity market. The table below is taken from the website Gurufocus. 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