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Apologies to golf fans (which would include me) but this is not a Ryder Cup themed post. Instead, I want to write about a drier debate we are having internally about the correct weighting in our portfolios to US equities. And boy, has investor sentiment on this changed recently. We have gone from US exceptionalism being good (less regulation, more capitalism, more wealth creation) to it being a disaster (tariffs, nationalism, Trump headline roulette) in just the last few weeks. As an example, you can see this change of sentiment in the latest Bank of America Merrill Lynch (BAML) fund manager survey data:
I generally view surveys like this – especially when they are at extremes – as a bit of contrarian indicator. But the mid-2000s period catches my eye as there was a sustained period of US under-performance (emerging markets was where the money was made). The obvious point to make is that the self-inflicted harm of much higher tariff levels does indeed make the US a less attractive place to invest today. If extra tariff costs are absorbed by US companies this will hit margins and corporate profit levels. If they are passed onto consumers this will be inflationary and reduce the amount of spare cash available to spend on other things. And these are just the first order effects. You have to believe major investment and hiring decisions are on hold right now. And goods from China (currently subject to 145% tariffs) are just about to (suddenly) stop arriving on US shores.
If the US is less exceptional then the premium its assets command is less justified. Yet the US market still trades around 20x earnings making it the most expensive major market globally. It is also worth pointing out this is not just a tariff story. The US technology giants have also been hit by the (open source) China Deepseek AI model proving to be the equal of Open AI. For a few thousand pounds, you can download the model and run it on your own PC. This makes some of the huge investment being made into data centres and model training look vulnerable to cheaper imitators.
So why are we having a debate at all? The US is objectively less attractive today but still expensive. Part of the reason not to rush to sell is because part of the move in relative pricing has happened already. As I write, our European value fund is around 25% ahead of the S&P 500 Index year-to-date. After years of exceptional out-performance here is the S&P 500 in unhedged currency terms for different international investors since the start of last year.
And rather like the sentiment data I started with, investor positioning data also looks stretched (see the next chart). If we see climb downs and compromises on tariffs from the Trump administration (and there have been hints of this this week) we might see some recovery for US assets in the short term. If there is no real climb down this will of course be bad news. But I have a hard time believing that markets like Japan and Europe, which are typically more geared to the global economic cycle, will prove to be a safe haven in any recessionary storm.
The other worry I would have if we were rotating out of the US would be over technology earnings. As ever, is the recovery in European equities a sharp bear market reversal or the start of a new trend? Over the last decade or more US markets have justified their premium (and so haven’t in reality been “expensive”) because they have generated superior earnings growth led, of course, by technology. Thinking Europe (and other non-US markets) will out-perform longer term is to think the trend of inferior earnings growth shown in the chart below is over.
There are plenty of good reasons to want to diversify away from the US today (as we have in fact done). But this is not the no-brainer trade that some are painting it to be. And, timing-wise, there may be better entry points in the weeks and months ahead.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
