US equities have outperformed global benchmarks in recent years.
This is attributable to a relatively strong US economy – which has markedly outperformed developed market peers since the pandemic – valuation expansion, and strong earnings growth.
The earnings growth in aggregate has been higher in the US compared to other regions of the world.
In large part this success is down to the thriving US tech industry, typified by the magnificent seven, which have delivered significant returns, providing growth and resilience to a well-diversified portfolio.
Chris Arcari, head of capital markets at Hymans Robertson, notes that the outperformance of US equities has been in large part due to US exposure to rapidly growing technology companies, where earnings growth, and expectations of future earnings growth, have been supercharged by the adoption of AI, which in turn has been accelerated by changing working, spending and leisure habits.
Ben Conway, chief investment officer at Hawksmoor Fund Managers, says: “US equities have been outperforming global equity markets for more than a decade. A great deal of this has come from valuation expansion. Some has come from superior and consistent earnings growth.
“It would be churlish of me not to recognise that the US does deserve something of a valuation premium as a result. However, that valuation premium has now reached eye-watering levels.”
US equities are expensive relative to almost all other equity markets and some argue they are the most expensive they have ever been relative to their own history.
US equities have been outperforming global equity markets for more than a decade. A great deal of this has come from valuation expansion
And, according to Conway, this is the most significant headwind that the market faces. It is also the most certain headwind.
Conway adds: “Valuation is a strong indicator of future returns – not a perfect indicator, but one of the best indicators over periods longer than five years.
“Buying as expensive a market as the US at today’s valuation relies on getting out with pristine market timing – a notoriously difficult skill.
“I would argue this is the most significant issue to contend with when contemplating an investment into this market – far more significant than wondering about whether Trump’s policies will match the campaign rhetoric. That being said, valuation dispersion is high.”
The most expensive stocks are the largest ones, meaning the market in aggregate – when looking at market-cap weighted measures – is also expensive, Conway says.
“Smaller companies are nowhere near as over-valued. We happen to believe UK smaller companies are even cheaper, but anyone considering an allocation to the US should look down the market cap spectrum to avoid excessive valuation.”
Role in a portfolio
US equities hold a very important role within a portfolio as a growth driver.
