Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 594

How can you not be bullish the US?

Great question. (Wish I had asked it 5, 10 or 15 years ago.) Near-term – say, to pick a random date, until 20 January 2025 – momentum may stay with the US trade. But beyond that US equities look rich, their EPS advantage may narrow, rising bond yields may crimp returns, and the next cycle – which isn’t here yet – should favour other markets. I’m not convinced Trump can offset these headwinds.

Who’s not bullish the US? Exhibit 1 – nicked from Torsten Slok – shows the share of US consumers expecting higher equity prices is now at an all-time high. The AAII survey is also high (not at a record). So is Mike Hartnett’s BoA fund manager survey. I don’t know when this will peak. The bulls can project their hopes and dreams on the President-elect until inauguration day (20 January 2025).

Exhibit 1: Everyone (almost) expects higher equity prices

Source: Conference Board, NBER; Minack Advisors (thanks Torsten Slok)

The key to US exceptionalism has been earnings out-performance. Since 2016 EPS-driven out-performance has been enhanced by the US market rerating versus other markets (Exhibit 2).

Exhibit 2: Earnings drove most (not all) US exceptionalism

Source: MSCI, IBES/DataStream, NBER; Minack Advisors

That rerating coincided with a widening gap between US and non-US long-run EPS forecasts. The gap between expected US and non-US long-run EPS growth is now at 8%, a record, excluding 4 months in the GFC (Exhibit 3).

Exhibit 3: US exceptionalism is for the long run

Source: MSCI, IBES/DataStream, NBER; Minack Advisors

I doubt that US EPS growth will outpace the rest of the world’s by that much. Even if it does, that superior EPS growth is now in the price. Exhibit 4 shows prospective PE ratios based on long-run (5 years ahead) EPS level. The US market has re-rated relative to other developed markets even after taking into account its faster long-run EPS growth.

Exhibit 4: US is expensive even with exceptional EPS

Source: MSCI, IBES/DataStream, NBER; Minack Advisors

The US market is expensive relative to its own history, relative to other markets and relative to other assets. The prospective earnings yield is now in line with the 10-year Treasury yield (Exhibit 5). I expect 10-year yields to breach 5% in 2025. At some stage rising long-end yields will be a headwind for equity valuations in the US.

Exhibit 5: Exceptional valuation at risk from bond yields

Source: MSCI, IBES/DataStream, Bloomberg, NBER; Minack Advisors

The post-GFC cycle saw unusually strong US EPS growth and unusually weak EPS growth outside the US. Why will that change? The principal reason why ex-US EPS has been so weak since the GFC is that earnings had ballooned to unsustainable levels before the GFC. EPS in US$ terms quadrupled between 2002 and 2008. That EPS bubble bursting kept EPS weak for several years. However, rest of world EPS is now back on its pre-bubble trend and has resumed normal growth through the past few years (Exhibit 6).

Exhibit 6: The rest of the world back on EPS growth trend

Source: MSCI, NBER; Minack Advisors

US EPS has grown at an above-average pace since the GFC: 4% real over the past decade versus a long run average of 1.75%. Most of that exceptional growth – and most of the recent US EPS out-performance versus other markets – is due to the Magnificent 7 (Exhibit 7). I don’t analyse single names, so I don’t have a strong view on how long the Magnificent 7 can maintain EPS growth at recent rates. At some stage the law of large numbers will have to kick in. But several clients have commented that 2025 will be the ‘show me the money’ year where investors will want companies to show the payoff for the massive investment in artificial intelligence. If the returns aren’t there, valuations could fall.

Exhibit 7: Mag 7 explains most of US EPS exceptionalism

Source: Bloomberg, IBES/DataStream, MSCI, NBER; Minack Advisors

Much of the recent EPS out-performance of the S&P493 versus the rest of the world has been driven by diverging macro growth rates (Exhibit 8). However, I expect the growth gap between the US and the rest of the world to narrow in 2025.

Exhibit 8: This was not the year for RoW recovery

Source: Bloomberg, NBER; Minack Advisors

Mr Trump’s election has turbocharged US outperformance. While there may be a few sectors that benefit from specific policies, it’s not clear to me that Trump locks in sustained US equity outperformance. The cycle gap between the US and non-US markets should narrow next year. The prospect of higher long-end yields is a greater threat to the expensive US market. Mag 7 performance will be tested if AI underwhelms. And everyone is so bullish the US, who’s not already in?

 

Gerard Minack founded Minack Advisors in 2013 and has a wealth of experience as a macro strategist.

This article contains material based upon publicly available information, obtained from sources considered reliable, and is not soliciting any action based upon it. Opinions expressed are current as of the date of publication. All forecasts and statements about the future, even if presented as fact, should be treated as judgments, and neither Minack Advisors Pty Ltd nor its partners can be held responsible for any failure of those judgments to prove accurate. Minack Advisors Pty Ltd is regulated by ASIC, authorised representative number 443937.

 

RELATED ARTICLES

UniSuper’s boss flags a potential correction ahead

2025: Another bullish year ahead for equities?

That’s racing: financial markets and wagering parallels

banner

Most viewed in recent weeks

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Latest Updates

Superannuation

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Superannuation

Less than 1% of wealthy families will struggle to pay super tax: study

An ANU study has found that families with at least one super balance over $3 million have average wealth exceeding $19 million - suggesting most are well placed to absorb taxes on unrealised capital gains.   

Superannuation

Are SMSFs getting too much of a free ride?

SMSFs have managed to match, or even outperform, larger super funds despite adopting more conservative investment strategies. This looks at how they've done it - and the potential policy implications.  

Property

A developer's take on Australia's housing issues

Stockland’s development chief discusses supply constraints, government initiatives and the impact of Japanese-owned homebuilders on the industry. He also talks of green shoots in a troubled property market.

Economy

Lessons from 100 years of growing US debt

As the US debt ceiling looms, the usual warnings about a potential crash in bond and equity markets have started to appear. Investors can take confidence from history but should keep an eye on two main indicators.

Investment strategies

Investors might be paying too much for familiarity

US mega-cap tech stocks have dominated recent returns - but is familiarity distorting judgement? Like the Monty Hall problem, investing success often comes from switching when it feels hardest to do so.

Latest from Morningstar

A winning investment strategy sitting right under your nose

How does a strategy built around systematically buying-and-holding a basket of the market's biggest losers perform? It turns out pretty well, so why don't more investors do it?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.