Underperformance of Japan's stock market may end soon

In April, major stock indices edged higher in the US and Europe but fell further in Japan. We think equities in the US are likely to struggle as the Fed becomes less accommodative, and our end-2015 forecast for the S&P 500 remains 1,900. We do not believe a crash is imminent simply because Shiller’s cyclically-adjusted price/earnings ratio (CAPE) is about 60% higher than its long-run average. The current level of the CAPE exaggerates the degree of overvaluation because reported earnings collapsed during the Great Recession. When operating earnings are incorporated in Shiller’s CAPE from the late 1980s onwards, and adjustment is made for changes in corporate payout policy, the degree of overvaluation reduces to around 25%.