Is US stock market exceptionalism over?

(Image credit: Wong Yu Liang / Getty Images)

If nothing goes awry between now and the new year, 2025 will end up being a much better year for stocks than looked likely eight months ago. The US tariff sell-off in early April was severe at the time, but the slide ended faster than expected and markets rebounded quickly.

For all Donald Trump’s bluster, the reality is that he backtracked on the level of tariffs pretty significantly. Foreign governments signed a bunch of deals to placate him, including many promises around investment and trade that they will do their best not to deliver. Central banks began loosening monetary policy a bit more. So stocks went up again: the MSCI ACWI index – which includes developed and emerging markets – have returned a very strong 18% (including net dividends) in local currency terms.

It is likely that the full effect of the tariffs is yet to show up. It is also plausible that at some point the Trump administration will a) notice that the rest of the world has no intention of actually funnelling hundreds of billions of dollars more into the US and b) start to worry about some early signs of a slowdown in the part of the economy that is not fuelled by AI spending. At that point, it may decide to start a fresh trade war with China and Europe. However, until then, we are where we are: business as usual.

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A long-term view on US stocks

Yet something is different. US stocks have returned around 16% this year – an above-average performance. However, that is only just in line with Europe and well below many European countries (including the UK), Japan and emerging markets. Note too this is in local-currency terms: factor in the drop in the US dollar and investors have done better in almost any other market. This runs against American outperformance in recent years and is the opposite of what most strategists were expecting at the start of 2025.

We cannot know whether this will happen again next year. However, on a long-term view we can note that the MSCI USA index trades on a forecast earnings yield (earnings divided by price) of around 4.5%. The MSCI Europe index is on an earnings yield of over 6.5%, the MSCI Japan is around 6% and the MSCI Emerging Markets is a bit under 7.5%.

In theory, the earnings yield is a direct proxy for expected longer-term real returns. You either get earnings back as dividends or reinvested by companies to create growth – either way, a higher yield should mean stronger returns. Reality is never that simple, but it is unarguable that the US will have to keep delivering much better earnings growth than the rest of the world to overcome the drag of starting on a lower yield.

So on a longer-term view, the odds are in favour of an extended spell when the rest of the world outperforms. This is why our asset allocation portfolio – which I will be reviewing shortly – keeps significantly underweighting the US despite its strong past performance. That call may finally be starting to work in our favour.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.