Global investors flock to US markets, ignoring rising valuations

In its article, Financial Times features that as global markets experience a shift in dynamics, the concept of "American exceptionalism" has gained unprecedented momentum, particularly in the world of investment. 

The notion of America as a unique, superior nation, destined to lead the world, appears outdated to many observers. In political, diplomatic, and military circles, the conversation focuses on a dysfunctional superpower, isolationist abroad, and polarized domestically. However, in the investment world, "American exceptionalism" is more popular than ever.

Driven by confidence in the strength of US financial markets and their ability to outpace other economies, global investors are pouring more capital into the US than ever before in modern history. The US stock market now stands apart from the rest. Relative prices are at their highest level since data collection began over a century ago, and relative valuations are at a peak not seen since half a century ago.

As a result, the US now comprises nearly 70 per cent of the leading global stock index, a significant increase from 30 per cent in the 1980s. Additionally, the dollar, by certain measures, is trading at its highest value in 50 years since the developed world moved away from fixed exchange rates.

The prevailing view is that the gap between the US and the rest of the world is warranted due to the earnings power of top US companies, their global presence, and their leadership in technological innovation. These strengths are indeed real. However, one definition of a bubble is when a good idea is pushed too far. The admiration for "American exceptionalism" in markets has now exceeded reasonable bounds.

America’s share of global stock markets far exceeds its 27 per cent share of the global economy. The anticipated return of Donald Trump to the White House has further highlighted this disparity. Investors believe that his proposed policies, including raising tariffs, cutting taxes, and reducing regulations, will continue to boost US markets, which have outpaced the rest of the world since the global financial crisis. In November, following Trump’s victory, the US experienced its strongest month of outperformance yet.

It’s as if the only market worth investing in is America. While traveling in Asia and Europe, I encounter many investors who seem almost awestruck by the global giant. In Mumbai, financial advisers are urging their clients to diversify outside of India by investing in the one market that is even more overpriced — America. In Singapore, at a lunch with wealth managers, the host asked, “Anyone here who does not own Nvidia?” Not a single hand was raised.

This is not a bubble in US markets; it’s a global mania. At the peak of the dotcom bubble in 2000, US stocks were valued higher than they are now. However, the US market didn’t trade at such an enormous premium to the rest of the world.

This isn’t merely a rebranded AI mania. On indices that equally weight stocks regardless of size and adjust for the dominance of Big Tech, the US has outperformed the rest of the world by more than four to one since 2009.

By Naila Huseynova