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The case for and against US stock market exceptionalism

23 January 2025 Duncan Lamont, CFA, Head of Strategic Research at Schroders
Duncan Lamont

Duncan Lamont

Whichever side of the debate you sit on, you should challenge yourself by considering the alternative.

US stocks finished 2024 comfortably on top of the world for the sixth year of the past seven. The MSCI USA index returned 25% over the year. In contrast, the MSCI Europe ex UK index languished at a mere 1% (Source: LSEG Datastream, MSCI, Schroders).

Haters gonna hate
It is popular to hate on the US stock market and predict an end to its extended dominance, even as inflows continue apace. But bull markets don’t die of old age. There has to be a reason.

In this article, I set out five reasons why now might be the time to downgrade exposure to US stocks (specifically, large caps). However, it would be unbalanced to not also consider valid arguments in the other direction. I highlight six here. Whichever side of the debate you sit on, you should challenge yourself by considering the other, rather than blithely discounting it.

Could US stock market exceptionalism continue?

The arguments against investing in US stocks

1.US valuations are uncomfortably high



Outside the peak of the Dotcom bubble, US valuations are close to their most expensive in the past 143 years. This chart shows the cyclically adjusted price-earnings multiple (which compares prices with average earnings over the previous 10 years) but we could have equally made the same argument using other valuation measures and over shorter time horizons.

Although not a new argument, last year’s rally has propelled valuations to uncomfortably high levels.

2.US valuations are stretched to the extreme vs other stock markets
While the US is at levels which historically would have been bubble territory, valuations elsewhere are actually quite reasonable. The chart below shows a composite valuation indicator for five major stock markets, with degrees of expensiveness/cheapness averaged across five individual measures: CAPE, trailing price/earnings, forward price/earnings, price/book, dividend yield. These are calculated on a “z-score” basis, which adjusts for differing variability of the individual measures to make them more comparable.

Outside of the US, valuations are close to fair value when compared with history. It is only the US which is extended.

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