A Decade of U.S. Market Exceptionalism Probably Won't Repeat -- Journal Report
By James Mackintosh
Rank the performance of stock markets over the past decade and,
in rough approximation, these are the results: U.S. first,
everywhere else way behind.
Bears often argue that U.S. market exceptionalism is a bubble,
especially with valuations as high as they are.
However, the primary reason for the outperformance of U.S.
stocks is that America itself has performed far better this decade
than other places. Its economy has beaten those of most other
developed countries. Its companies have led in new disruptive
technologies. It has avoided the crises that have hit Europe and
many emerging markets. It fixed its banks after the recession more
quickly than Europe. And -- perhaps thanks to a lack of antitrust
enforcement -- earnings have soared, even as the dollar has done
Fundamentals matter, and America's fundamentals have just been
Yet there are two reasons to doubt the sustainability of this
outperformance. The first is that performance tends to go in
cycles, as governments shift policy, companies rise and fall, and
technologies develop (remember that the standard mobile phone of
the 2000s was designed in Finland, not California).
The great decade for the U.S. followed a terrible decade in the
2000s, when U.S. stocks lost money even with dividends reinvested,
and beat only Japan among large markets. Over the past two decades
together, the U.S. sits in the middle of the pack of significant
markets, ahead of Japan, the U.K. and eurozone, but behind Canada,
Australia, Sweden, Switzerland and emerging markets. (Throughout
this article performance is considered in dollar terms including
Second, it's historically rare for richly valued markets to hold
on to their valuation premium over many years, and the U.S. --
thanks to a handful of very large technology companies such as
Apple, Amazon, Facebook and Alphabet -- is richly valued compared
with the rest of the world. If the next decade is a repeat of the
one now ending, maybe the U.S. can stay ahead.
But the next 10 years are likely to bring big changes, political
turmoil, new technologies and a shift from reliance on monetary
policy -- which is hobbled by low interest rates -- to a bigger
role for government stimulus in determining market direction. Not
only does the U.S. have to weather these changes better than other
markets, it has to do so by enough to justify retaining its premium
The real drivers of the U.S. lead are the massive outperformance
of economically sensitive cyclical sectors such as industrials,
consumer discretionary and financials; the predominance of tech
companies within the U.S. market; and the strong dollar over the
The dollar started out the decade badly, falling in 2011 to its
weakest against trading partners in modern history amid fears that
a debt-ceiling standoff between the White House and Congress could
lead to a default. In the end there was no default, but the loss of
the government's coveted triple-A credit rating that August marked
the low point for the currency. The stronger economy and trouble
elsewhere helped the dollar rebound more than 33% since then,
putting it above its average exchange rate since 1970, according to
JPMorgan Chase's inflation-adjusted trade-weighted currency
Fundamentals drove investors to buy the U.S., but American
stocks did far better than the performance of the U.S. economy or
even global earnings of U.S. companies would justify on their own.
It is at least doubtful that such a performance can be
Three things happened. American companies increased profits from
abroad in a spectacular way, helping S&P 500 profit margins to
a record last year even as corporate profit margins within the U.S.
slumped from their 2012 peak to below where they stood at the end
of 2009. With politicians turning against globalization, low-tax
countries under pressure and foreign regulators turning their
attention to the high profits made by some of the largest U.S.
companies, simply maintaining margins would be a positive
Big tax cuts boosted earnings, something unlikely to happen
again given how low U.S. corporate taxes now are.
And valuations soared. At the start of 2010 the U.S. market was
valued at 14.5 times expected operating earnings over the next 12
months, according to I/B/E/S Estimates. That has now jumped to
almost 18 times, valuing the U.S. market much more highly than the
eurozone, U.K., Japan or emerging markets. The rise in valuation in
the U.S. was also far bigger than elsewhere (forward
price-to-earnings ratios for Japan and emerging markets fell over
the decade). Price-to-book multiples in the U.S. have also
If the S&P valuation rose by the same amount again, it would
take the forward P/E ratio to 21, a level reached in data since
1985 only during the dot-com mania of the late 1990s. It's not
impossible, but it would require a big bubble, something that
doesn't happen often.
Of course, if the next decade brings more natural disasters,
political unrest and currency crises, the U.S. may well benefit
from its relative stability. Even then, it would be foolish to
expect a repeat of the wonderful bull market of the past
Mr. Mackintosh writes The Wall Street Journal's Streetwise
column. He can be reached at email@example.com.
(END) Dow Jones Newswires
December 17, 2019 21:05 ET (02:05 GMT)
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