Schroders Investment: U.S. stock valuations are nearing the most expensive levels in 143 years, but there are still multiple reasons to support investment

According to the Zhitong Finance APP, Duncan Lamont, head of investment strategy research at Schroders, expects the U.S. stock market to continue to hold the top position globally in 2024, marking six out of the past seven years at the top. There is a general expectation that the long-term advantage of U.S. stocks will come to an end, and it is believed that now is the time to reduce holdings in U.S. stocks, especially large-cap stocks. However, failing to consider effective counterarguments would be insufficiently comprehensive. Except during the tech bubble, U.S. stock valuations are nearing the most expensive levels seen in the past 143 years. While this is not a new argument, this year's rebound has pushed valuations to unsettling highs. In contrast, valuations in other regions are relatively reasonable. Compared to historical levels, valuations outside the U.S. are close to fair value. Therefore, from a relative value perspective, other stock markets remain at historically low valuations compared to the U.S. In fact, the U.S. is not the only market expected to perform well. It is anticipated that about half of companies in Europe and Japan will achieve double-digit profit growth over the next 12 months, slightly higher than in the U.S., while 44% of British companies are also expected to perform similarly. Productivity levels are a key driver of economic growth. In the years following the global financial crisis, U.S. productivity growth outpaced other countries, and during the COVID-19 pandemic, productivity not only did not decline but accelerated further. This gap is expected to persist. If these predictions hold true, the U.S. economic exceptionalism will continue. Additionally, the U.S. working-age population is expected to increase, while other countries will see a decline, supporting long-term economic growth in the U.S., although this all depends on the future development of immigration policies. The U.S. has also performed better in economic cycles, delivering more positive economic surprises than other regions. Schroders' economic research team recently raised its growth forecasts for the U.S. economy in 2025 and 2026 in response to President Trump's plans. The growth forecast for next year is now 2.5%, up from 2.1%. In contrast, the growth forecasts for the Eurozone and the UK are only 1.2% and 1.6%, respectively. However, strong economic growth comes at a cost: higher inflation expectations. While the baseline forecast is for strong U.S. economic performance, in a downside scenario, higher inflation and interest rates could push the U.S. towards stagflation. About 60% of the revenue of large U.S. stocks comes from the U.S., while other markets account for less than half. If the U.S. economy indeed thrives, U.S. companies will be the main beneficiaries. However, it is worth noting that small-cap and value stocks in the U.S. are more dependent on domestic growth than large-cap stocks, and if this is the main reason supporting U.S. stocks, it may provide a better investment approach for U.S. equities. Additionally, companies engaging in stock buybacks and mergers and acquisitions also provide a continuous source of demand for U.S. stocks