Over the last few months, Wall Street has slowly come to the consensus that stocks are over-valued and that this rally is fragile.

On Wednesday morning, Deutsche Bank’s Jim Reid challenged that notion in a note to clients. In the note, he updated his comparison of stock markets around the world to where global purchasing manager indices (PMIs) – which give a sense of how business activity in a country is doing – imply those markets should be.

That, of course, differs from the more commonly used price to earnings (P/E) ratios often used to value stocks.

“…today we’ve updated the tables and charts we often use with PMIs from major countries alongside YoY change in equity markets with a table as to where the PMIs suggest regional equity markets should be YoY. Following April’s data the PMIs across key markets suggest most major markets should be 10-20% higher than a year ago,” Reid wrote.

Since major stock indices in most of those countries actually did go up between 10% and 20% over the last year, if you look at it this way, stocks are pretty fairly valued.

Before you light your hair on fire, just consider this a thought exercise - one that yields interesting results if you take a bird's eye view of how businesses in each country are doing in aggregate while also taking into consideration the individual quirks of each market.

From Reid (emphasis ours):

"Germany is the outlier at 28% and it's actually 24% higher than last year so performance isn't stretched based these numbers.

"Eurozone equity market performance is within 5% of where it should be while the US is now about 2% 'expensive' having been cheap last month, with the ISM dipping to 54.8 in April. The UK is pretty much in line while Japan and China look 'overvalued' (to the tune of 8% and 14% respectively). As we always say this exercise should be a general guide to valuations and works best looking across the board rather than for individual markets where quirks can lead to temporary divergence from 'fair value'."

Check out the data below along with a few charts to illustrate the point.

Here's all the regional data comparing PMI's to stock performance. The most recent US PMI reading of 54.8 suggests that the S&P 500 'should' have gone up 13% over the last year according to Reid's model, when in reality it went up 15%, more in line with a PMI reading of 55.5.

Foto: source Deutsche Bank

Here's the comparison between US PMI and the S&P 500.

Foto: source Deutsche Bank

The comparison for the Euro Area PMI and EuroStoxx index.

Foto: source Deutsche Bank

And finally Germany's PMI compared to where the DAX is.

Foto: source Deutsche Bank