Bob Homan: How exceptional are Americans still?
This column was originally written in Dutch. This is an English translation.
By Bob Homan, Head of ING Investment Office
The Trump administration is causing the US to lose a few unique advantages. But their stock markets will certainly not just end up in the middle of the pack.
Until 2024, US equities outperformed equities in the rest of the world for many years, and certainly outperformed those in Europe. This year, however, the opposite is true. This raises the question of whether the long-standing trend of US outperformance relative to Europe is definitively over, or whether this is merely a temporary reversal.
Based on superior earnings growth
Let's first look at the most important factor behind ‘American exceptionalism’ for equities, namely superior earnings growth. This relatively high earnings growth has increased the valuation gap with the rest of the world. And this relatively high earnings growth is in turn linked to economic growth, which has been significantly higher in the US than in Europe. As is probably well known, economic growth can be divided into two aspects: growth in the labour force and an increase in labour productivity. Both developed better in the United States than in Europe.
The US is losing two important advantages...
However, in my opinion, the difference will narrow in both areas. The growth of the labour force is most obvious: it will decline as a result of the ‘less immigration’ policy. The development of labour productivity is somewhat more complicated, but I believe that this too will be negatively affected by the Trump administration's policies.
This is because, first of all, international competition, and with it the pressure to remain the best, will decline as a result of import tariffs. In addition, cuts in scientific research will hamper innovation. It is precisely the interaction between government-funded research and its application by industry that has helped the US achieve technological dominance. The difference in labour productivity growth compared to Europe will decrease, certainly also because Europe has become aware of the causes of the difference and is at least considering how to curb it quickly.
...but not all of it
However, a number of competitive advantages remain for American companies, which, in addition to the declining growth gap, continue to ensure higher margins. Think of more flexible regulations on, for example, dismissal law and permits, but also the large, uniform domestic market, which remains a huge advantage. In short, the American exceptionalism for equities is diminishing, but it remains.
US equities may therefore well have slightly higher valuations than their European counterparts. This difference will simply be smaller than at the beginning of this year. I do not know whether this narrowing of the valuation gap with the outperformance of European equities has already been fully completed, but I also have no reason to believe that US equities will continue to underperform for any length of time.
