US equity outperformance driven by richening valuations
The bull run in US equities relative to international markets post-GFC has been driven primarily by valuation expansion (richening) rather than sustainable structural growth advantages.
The argument
The guest argued that while the US has historically had a modest earnings-per-share growth edge of about 1% over the rest of the world, post-GFC that edge expanded to 3%, which is historically unsustainable. This narrow window of outperformance has driven US relative valuations to nearly double those of international markets, creating a dangerous setup for investors extrapolating past returns.
The thesis, stress-tested
✓ What validates it
- ✓US CAPE ratio reverting from current levels near 40 back toward historical averages
- ✓US corporate earnings growth slowing down to its historical 1% premium over international markets
▸ Risks discussed
- ▸AI-driven growth could potentially justify unprecedented valuation levels
- ▸Structural changes in the market could permanently shift the average CAPE ratio higher, making historical mean reversion models obsolete
Hear it yourself
"took off. And we reached almost almost two last December, and we are still, I don't know, 1.8 ish or something like that. So we are we are at very, very high level. So US has almost doubled the valuations than the rest of the world. And, again, I argue that that's because because the growth expectations are sort of taken with the narrow window of the post GFC experience, and and really that's that's"
14:24 · 14:24
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