The US stock market has been exceptional over the past decade by consistently outperforming its global peers. The strength and vibrancy of the US economy, along with innovation in the tech sector, has driven company earnings and market performance higher during this time.

However, the downside to this is that US equity valuations are becoming ever more demanding, and the market is increasingly concentrated, creating risks.

Will there continue to be a Trump bump for US stocks?

Although it is still early days, global equities have had a mixed performance since the US presidential election on 5 November, and US stock returns have risen significantly compared to European or global equities. This divergence can broadly be explained by investors’ anticipation of tax cuts and deregulation from the incoming Trump administration, as well as ongoing solid US economic fundamentals.

In contrast, UK Chancellor Rachel Reeves’ tax raising budget did little to boost the domestic stock market.

Elsewhere, European stocks appear in the crosshairs of potential US tariff hikes under president-elect Trump, while the collapse of the German governing coalition and the French government of Michel Barnier has not helped either. Investors can expect political uncertainty in the two largest European economies for a while yet, it seems.

Drivers of US equity exceptionalism

Now the dust has settled following the US election, investors’ focus will gravitate back to the dynamism of the US economy and the ability of its listed companies to deliver on earnings. This is where US equity exceptionalism kicks in.

First, the US economy has a consistent track record of growing faster than other major economies, providing domestic firms with the capacity to expand their revenue growth. Much of this economic outperformance boils down to relatively favourable demographics and stronger labour productivity growth. For instance, US labour productivity has averaged a 1.6% annual growth rate over the past two decades, compared to 0.6% for the UK and 0.5% for Germany.

Second, the US excels in innovation. A relatively low tax regime, combined with buoyant research and development expenditure has helped nurture some of the most valuable and highly profitable technology companies in the world. US tech companies have helped lift the overall equity market profit margin to more than 12%, above the UK and Europe ex-UK at 10.7% and 9.6%, respectively.

Third, the US government continues to run a large budget deficit, as it is spending more than it raises in taxes. This loose fiscal approach ensures that the private sector can sustain spending. During Covid, when the government directly supported households, it also alleviated the need for companies to pay higher wages which would have reduced profit margins. If President Donald Trump cuts personal taxes in 2025 it could have a similar impact.

Collectively, these factors have contributed to relatively solid company earnings. Since the Global Financial Crisis of 2008, US listed companies have, on average, grown their reported trailing earnings per share (EPS) by around 6% per year more than non-US peers. This has driven outperformance of the US stock market relative to global peers as shown in the chart.

Looking towards 2025, faster relative US real gross domestic product (GDP) growth is likely to continue. The latest Bloomberg survey of economists shows 1.9% real GDP growth in the US, versus 1.5% for the UK and 1.2% for both the EU and Japan. While many companies generate their earnings from across the world, the US economy can continue to support earnings per share (EPS) growth in its equity market.

Aside from earnings, US firms have also demonstrated a shareholder-friendly focus. US companies continue to return relatively more cash back to investors through share buybacks.

The bottom line here is that US companies have an inbuilt ‘X’ factor from solid and sustainable earnings growth, as well as a shareholder friendly culture, to drive total equity returns.

Risky business

There are, however, risks associated with US equity exceptionalism. First, US equities trade at a record high 65% price-to-earnings premium to global equities (excluding the US). The risk here is that the current valuation of the market is too expensive and prices adjust to a lower level.

Second, the US faces acute market concentration risk. Artificial Intelligence (AI) – related stocks like Nvidia account for a sizeable share of stock market performance. Together, the Magnificent Seven stocks account for a near record 33% of the benchmark S&P 500 market cap. Should the AI theme fail to deliver against investors’ expectations, there is a risk that tech stocks could weigh (negatively) on overall US equity performance.

Third, US government debt (currently over 120% of GDP) continues to accumulate at an alarming rate. Given Trump’s tax cutting agenda, US Treasury debt could rise even faster under his administration. For now, the US has relied on deep and liquid bond markets and its reserve currency status. This helps it to attract investment capital to avert a sharp uptick in Treasury yields. However, at some point in the future, fixed income investors may demand higher yields to compensate for the increasing financing risk that that comes with lending to the US government.

Finally, there is also the risk of currency depreciation. For now the US$ is relatively strong, (aside from currencies like the Swiss Franc, although even here it has appreciated considerably since Trump was re-elected), but there may come a time when the financial markets no longer believe in the supremacy of the dollar. This is unlikely to happen fast, of course, but none the less it is a real risk and explains, at least in part, the rise of the gold price and crypto currencies in 2024.

Follow US tax cuts and deregulation

There was a clear winner when Trump beat Kamala Harris in the November presidential election. Not only did Trump win the popular vote and all seven so – called ‘battleground’ states, but he also increased his share of the vote in 49 out of the 50 states compared to 2020. Thus the uncertainty of a disputed outcome, in what had been a highly polarised election, was avoided.

Trump now has a strong mandate to deliver on his largely, equity market friendly campaign promises. This is because the Republicans achieved a “clean sweep” by winning control of the White House. the Senate and the House of Representatives, increasing the probability that much of his campaign rhetoric could become legislation.

On the fiscal front, Trump intends to keep taxes down for corporations and individuals. However, he has also made plenty of noise about broad-based trade tariff hikes, including applying them to Canada, China and Mexico (all of whom are the major trading partners with the US) on his first day in office on 20 January. This could be used to fund individual income tax cuts, which are due to expire at the end of 2025. Making them permanent will be a priority.

Trade tariff hikes may not be that drastic if they are used to incentivise other countries to invest in US-based manufacturing, rather than raising prices for consumers. Trump will be acutely aware of the damage higher inflation did to the Democrats in the last election. He will want his ‘America First’ agenda to facilitate the election of another Republican president in 2028.

Besides fiscal measures, Trump is set to push forward on deregulation and can count on a conservative leaning Supreme Court that has reduced the power of the federal government to regulate certain industries to support him.

Will the US continue to outperform peers?

US equities have rallied since Trump secured a Republican clean sweep with promises of tax cuts and deregulation. The clear mandate given to the US Republican party by the electorate should help the US to maintain its equity exceptionalism at the expense of the rest of the world.

In contrast, governments in countries that are raising taxes, like the UK, are creating headwinds to attracting investment. There are therefore good reasons to believe that the US can use its ‘X’ factor to outperform for some time yet.

Expert advice

At Blackden Financial we have been advising our clients in Europe for the past two decades on just such matters, so if you feel you may need advice now on how to construct a robust, well diversified investment portfolio, in Swiss Francs or other currencies, we suggest you book a no obligation ‘discovery’ call. There is no commitment and no cost.

Contact us on +41 22 755 0800, e mail info@blackdenfinancial.com or complete our Contact Form here  

One of our team will contact you and arrange a suitable time to discuss whether our service may be suitable for your situation and if so how best to proceed, step by step.