Dan Farmer

Questions over US dollar’s status seem premature

• While the US’ standing as the world’s largest and deepest capital market is not remotely under threat, disorder and disruption coming out of Washington is causing investor disquiet. This in part stems from the gap between institutional investors’ economic orthodoxy versus a US administration whose economic philosophy is hard to pin down, beyond characterising it as ‘transactional.’
• Ideally, investors want pro-market policies featuring fiscal restraint, action to curb galloping public debt, light-touch regulation, free trade, and low taxes.
• Instead, despite generating lots of headlines, Elon Musk’s Department of Government Efficiency (DOGE), which initially targeted an extremely ambitious US$2 trillion in government spending cuts, then downgraded to targeting US$1 trillion savings, now claims just US$160 billion in savings. The figure hardly moves the needle in the direction of fiscal restraint against annual US federal government spending of around US$6.8 trillion.
• Moreover, US government spending in the first 100 days of President Trump’s second administration has jumped 10% compared to the same period in the previous year. Then, of course, there is uncertainty from the back and forth on tariffs, as well as apprehension over potentially unfunded tax cuts.
• All up, you have a cocktail that is inducing investor apprehension showing up, amongst other things, in US dollar weakness, albeit still short term, with the greenback estimated to have lost around 10% of its value since Inauguration Day.
• US dollar weakness is striking because countries that impose tariffs usually see their currency rise. However, the untidy rollout of the administration’s tariff plans has bewildered investors and a general lack of transparency in terms of motivations have led to a sense of financial markets unease.

Threats to US equity market exceptionalism

• Markets are cyclical, and the US has not always dominated and so it is possible that share market leadership may flip from the US to the rest of the world, as it has done in the past.
• The most recent period of US stock market outperformance has been supported by positive economic and financial drivers, but these may be vulnerable to shifting macroeconomic forces and geopolitical risks.
• Since mid-2008, the S&P 500 has beaten the MSCI EAFE Index (this index measures the performance of large and mid-cap companies across developed markets countries, excluding the US and Canada), by a sizable margin, delivering average annual returns of 11.9% versus 3.6% through December 2024.
• Over the same period, the S&P 500 grew earnings four times faster than MSCI EAFE and boasted price-to-earnings (P/E) multiple expansion of 12.8x to 21.7x, compared to the MSCI EAFE’s expansion of 11.3x to 14.0x.
• Using return on equity (ROE) as a measure of how efficient companies are with their equity capital, the S&P 500 has maintained a higher ROE than the MSCI EAFE Index since June 2008, and that spread has widened over time. Currently, ROE for the US market is 19% versus 12% for EAFE.
• We think several factors have driven that difference, including US technological innovation, more efficient operations and shareholder-friendly government policies, such as corporate tax cuts.
• The combination of higher earnings growth and ROE have led investors to place a higher P/E multiple on the US equity market. At the start of 2025, the US stock market premium versus EAFE on a forward P/E basis was hovering at 55%, near its all-time high, although recent market volatility has narrowed the gap.
• In this context, it’s easy to see how the booming tech sector has contributed to US earnings growth and multiple expansion.

What may cause shift in market leadership?

• US share market exceptionalism has been a powerful trend, but it is arguable that risks, especially in the tech sector, are rising.
• Investors expect US earnings to keep growing but for US outperformance to persist, US company earnings will have to grow faster than those outside the US.
• As robotics and artificial intelligence emerge as the latest sources of technological advancement and economic growth, the US boasts leadership in these arenas, notwithstanding ripples created by DeepSeek.

By Dan Farmer, Chief Investment Officer​

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