American exceptionalism: US earnings growth to outpace global counterparts

There has been a series of articles and comments by numerous market observers on the United States (US) equity market, and the near-universal belief that it is the only market worth investing in. Most of these market observers are of the view that the US is in a bubble and we are seeing peak US bullishness. The consensus remains overwhelmingly positive on the US and many global investors have given up looking at other geographies like emerging markets (EMs). The EM asset class currently has serious challenges in trying to remain relevant. Much of the global outlook for 2025 and beyond continues to believe that the US is the only market really worth spending time and investment dollars on.

  Looking at the data, it is easy to see why everyone is positive on the US, and why the contrarians are deeply uncomfortable with the current level of positive sentiment towards US assets. American equities have massively outperformed those in all other geographies, generally over the years but especially so after the global financial crisis (2008). Since the beginning of 2010, in the 15 years till the end of 2024, the US markets have outperformed MSCI World equities in 14 of the 15 years. The only exception is 2017 (the first year of the Trump administration). Since 2010, US equities have outperformed MSCI Developed and EMs (ex-US) by 3.5 times. Over the past 10 years, the S&P 500 has outperformed European equities by 7.7 per cent annually and EM equities by 9.7 per cent annually. Truly exceptional numbers!

  The US today accounts for about 67 per cent of the MSCI World equity indices, meaning that corporate America is worth more than twice all other markets combined! The next biggest market is Japan, with an index weighting of only 5 per cent.

In any discussion on global equities, anywhere in the world, more than 90 per cent of the time is spent on the US. It is the only market which seems to matter. All other markets and global trends key off the US.

  Today US stocks trade at near-record absolute and relative multiples to global stocks. These high multiples are not only due to the Magnificent 7 (Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta, and Tesla). If we look at the S&P493 (ex-Magnificent 7), and compare them to European Union equities, there is a valuation premium US companies enjoy across every major sector. This valuation premium is linked to structurally higher returns on equity. 

However, it was not always so. The relative gap in valuation and performance in favour of US equities opened up after the global financial crisis. While the crisis was largely centred on the US, through a combination of aggressive and rapid policy responses and the willingness of corporate America to restructure and focus on profitability, the US broke out after 2009.

If we go back in time, leading up to the crisis, till the end of 2007, greater Europe had a higher market capitalisation and weighting in global indices than the US. From the beginning of 2002 to 2009, in that eight-year period leading up to the crisis, MSCI World outperformed the S&P 500 in seven of the eight years.

  Difficult to imagine today but back in 1989, Japan had a higher weighting in global indices than the US did, and was the most valuable and most expensive market in the world.

  While the US has the best long-term returns of all major equity markets, about 7 per cent real, it has not always been a one-way bet. There have been periods of five years, or even longer, when it lagged global markets. The US was not always a default overweight as we seem to see today. 

Combined with its stellar performance over the past 15 years, today we are seeing US valuations nearly at all-time highs, only surpassed on the Schiller CAPE (cyclically adjusted PE) by internet bubble readings of the year 2000. Even on sentiment indicators, on any survey of professional fund managers, bullishness on the US has never been higher. Retail sentiment indicators are also near all-time highs and retail flows into equities have rarely been higher. While the jury is still out on whether US equities more broadly are in a bubble, there are parts of the market and assets like crypto currencies which seem to be in a speculative frenzy. 

One can see the contrarian case. US equities have had an amazing run in the past 15 years, after 2008. On both sentiment and valuation, readings have rarely been higher. It is a consensus that one should never bet against the US, and the US weighting in global indices is near all-time highs. For anyone with any belief in regression to the mean, this is a classic setup.

I am sympathetic to this view and for an individual investor, or anyone managing proprietary capital, it makes sense to gradually underweight the US and fade the momentum. The US markets may or may not be in a bubble, but we are definitely at peak positivity on US equity assets. A period of underperformance is due to the US. 

As a tactical call, it is very easily possible that the US can underperform global equities for a five-year period. Given the relative starting points of valuation today, can the US lag other markets for a period of time? Definitely. Both EMs and Europe are due a bounce and are consensus underweights. This, however, to my mind is a tactical, trading call. Over longer periods, the US has delivered the best returns and must remain the core of any global equity allocation. Its lead in innovation and technology is just too great and the intense focus on profitability is such that ultimately earnings growth will be faster there than anywhere else in the world. 

For institutional investors the decision is more difficult. Given the hazardous nature of active money management today, most funds cannot afford the underperformance that being too early in underweighting the US will guarantee. Many of these funds had been advocating this relative switch away from US equities for the past five years and, having got it totally wrong, are uncomfortable sticking their neck out again. It is impossible to get the timing right as to when relative US underperformance will begin, Trees do not grow to the sky, the US cannot outperform forever. It cannot become 80-85 per cent of global indices. So this reversal of fortune will happen. It is just impossible to predict when. 

In such a situation it is easier to manage your own money and be accountable to yourself and take the risk of being early. Most institutional investors do not have the tolerance to face any extended period of underperformance. They will by definition be late in moving away from their US weightings. They will follow, not lead.  The author is with Amansa Capital