NEW YORK (TheStreet) - U.S. stocks are enjoying their best year since 1995, and whether or not the good times continue into 2014, one thing is clear: domestic equities have become expensive.
The S&P 500 has gained an eye-popping 23.3% in 2013, its best run to start a year since 1997 when the index advanced 26.7%. Those were the halcyon days of the Internet Boom, and we all know how that ended.
The U.S. benchmark currently trades at 15.9 times earnings, its highest level since May 2010, and a point at which BlackRock's (BLK) Russ Koesterich, the firm's global chief investment strategist, marks the group as fully valued.
"The majority of this year's U.S. market gains have come through higher multiples, not a boom in corporate earnings," Koesterich, who is based in New York, said in a phone interview. "Their premium to other markets is starting to look excessive."
Koesterich, who helps oversee more than $4 trillion, urges investors to consider Japan and Europe for more compelling opportunities. U.S. equities, by comparison, have been boosted by the Federal Reserve's stimulus program, producing valuations that are likely to remain high even if the Fed curbs its equity-boosting bond-buying.
More broadly, the U.S. economy is growing at about 2% per year -- a rate that seems to make high valuations hard to justify. Meanwhile, the green-shoots of recovery in Europe and Japan's emergence from decades of deflation, are generating stocks that are undervalued with higher growth potential.
"In Europe, the key is to look for larger companies that have very export-driven sales where valuations have been punished just by being based in Spain, Italy or Germany," he said. "In the UK, the economic recovery is also stronger than people expected."
Koesterich says U.S. stocks trade at about 2.5 times book value - or 2.5 times more than the value of their assets - compared to a ratio of 1.6 times for other developed markets and 1.5 times for emerging markets. The BlackRock strategist says U.S. stocks don't justify this premium. He says U.S. energy and technology stocks still appear reasonably priced but warns domestic shares in general will soon tip into overvalued territory unless earnings growth strengthens.