Thought Leadership

American Exceptionalism

By John Petrides on February 4, 2025

In financial markets today, the term “American Exceptionalism” has gained momentum, and rightly so, as shown in the chart below as well as in U.S. equity market returns compared with the rest of the world. Still, it can be argued that valuation for the S&P 500 is far from exceptional.

The chart shows the amount of global capital that has flown around the world and landed in U.S. These flows into both private and public equities, real estate, and fixed income securities dwarf the amounts flowing to other countries, and the gap is growing.

In 2023 and 2024, the S&P 500 index did something it has done on only nine occasions since the end of the civil war: increase by 20%+ in two consecutive years.¹ (Of course most, if not all of these returns were generated by the largest capitalization technology stocks that make up the so-called ‘Magnificent Seven’).  More on this later.

There are many reasons for this exceptionalism. The executional excellence of the U.S. Technology sector, pro-business policy, rule of law, relatively free markets compared with the rest of the world, strength of the U.S. dollar, energy independence, a strong economy, relatively full employment, and moderately accommodative monetary policy, coupled with fear of regulation, leverage, and demographic structural issues in China, lack of acceptable growth in Europe, and wars across the globe. To a very large degree, arguably, flight of capital into the U.S., and the returns of larger capitalization companies has been well earned.

What is even more impressive, is that these returns were accomplished with interest rates and inflation well above averages of the past fifteen years, and with the Federal Reserve trying to temper the strength of the economy.

The stock market only tells one side of the story. In contrast, take a look at the bond market. The long-dated U.S. Treasuries have been selling off, and yields have been rising, even in the face of the Federal Reserve lowering interest rates by 1% over the past four months. As our Chief Investment Officer Robert Kleinschmidt wrote on November 28, 2022, Thinking the Unthinkable, is the volatility in the bond market partially the result of the world growing concerned of the debt pile mounting in the U.S. and starting to question the credit quality of the U.S.? Bond investors might be starting to think that maybe the U.S. is not that exceptional.

Source: Strategas Research, “2024 Year-End Review in Charts,” page 5

At year end, the S&P 500 traded at nearly a 35% premium on a Price-to-Earnings (P/E) basis when compared to its long-term average. It is fair to say that a lot has been priced in.  But upon closer inspection, most of the U.S. market is not so pricey.   The valuation of these bottom, not so magnificent, 493 stocks is well within historical averages.  Given the nature of the largest companies that sit atop of the index (Apple, Amazon, Microsoft, Google, Meta, Tesla, and Nvidia), much rests on the sustainability of the proliferation of Artificial Intelligence (AI), but for the rest of these companies, a strong economy, enlightened fiscal and regulatory policy, and solid execution can provide for a salutary investment environment.

Value can still be had in U.S. stocks, but sharpening the pencil is required. Value based stocks, healthcare, financials, commodities in general, among others, are trading at attractive valuations.

More chatter is heard through the crowd trying to compare today’s environment in stocks to that of 1999. Visions of the future of AI is reminiscent of that of the early internet days. The major difference however is the companies leading the AI charge today are in fantastic shape from a balance sheet standpoint, are generating free cash flow once thought not possible, and are comfortably profitable and growing. Comparing today to past bubbles should be asked only if one believes investors are blindly buying U.S. stocks (and specifically the Mag 7 for that matter) simply because the relative performance has been so strong over the recent past.  AI is predominantly a U.S. story, and is indeed exceptional, however when asked if U.S. Tech stocks in particular are attractive from a valuation, the answer maybe far from exceptional.

John Petrides

Portfolio Manager

© Tocqueville Asset Management L.P.

This article reflects the views of the author as of the date or dates cited and may change at any time. The information should not be construed as investment advice. No representation is made concerning the accuracy of cited data, nor is there any guarantee that any projection, forecast or opinion will be realized. References to stocks, securities or investments should not be considered recommendations to buy or sell. Past performance is not a guide to future performance. Securities that are referenced may be held in portfolios managed by Tocqueville or by principals, employees and associates of Tocqueville, and such references should not be deemed as an understanding of any future position, buying or selling, that may be taken by Tocqueville. We will periodically reprint charts or quotes extensively from articles published by other sources. When we do, we will provide appropriate source information. The quotes and material that we reproduce are selected because, in our view, they provide an interesting, provocative or enlightening perspective on current events. Their reproduction in no way implies that we endorse any part of the material or investment recommendations published on those sites.

Source: ¹ JP Morgan, Eye on the Market, 01/02/2025, page 12

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