Summary of "U.S. Stocks Have Never Been This Overhyped or Expensive"

Money For the Rest of Us
Host: J. David Stein
Episode: 503
Release Date: December 4, 2024

Introduction: Unprecedented US Stock Performance

In episode 503 of Money For the Rest of Us, host J. David Stein delves into the remarkable outperformance of U.S. stock markets compared to global counterparts. Stein begins by highlighting the stark contrast in returns between U.S. stocks and the rest of the world over various timeframes.

• November Performance:
  "US stocks returned 6.2% in November, the rest of the world excluding us, the MSCI all country world ex US, fell 0.9% in US dollar terms last month." ([02:15])

• Year-to-Date Returns:
  "Year to date, 28% return compared to only 7.6% for all country world ex US." ([03:00])

• Long-Term Outperformance:
  "One year US stocks have outperformed non-US by 20 percentage points, by almost 8 percentage points over three years, by 10 percentage points over five years, 8 percentage points over 10 years and 5 percentage points over 20 years." ([03:45])

Factors Driving U.S. Stock Market Dominance

Stein explores several tangible and intangible factors contributing to the U.S. stock market's superior performance:

1. Superior Availability of Capital:
   "Superior availability of capital that US Companies have access to invest in new products and services." ([07:30])

2. Robust Venture Capital Ecosystem:
   "The network of venture capital investments for startups." ([08:10])

3. Attraction of Global Talent:
   "Perhaps a immigration and higher education system that attracts top technical and entrepreneurial talent from around the world." ([08:45])

4. Higher Corporate Profit Margins:
   "More productive and efficient companies with greater profit margins." ([09:20])

These elements collectively enhance earnings growth per share, a primary driver behind the U.S. stock market's success over the past decade.

U.S. Economic Productivity: A Comparative Analysis

Stein references a recent Economist article to underscore the U.S.'s economic productivity:

• GDP Per Capita:
  "The average American worker will generate $171,000 in economic output, compared to $120,000 for the Euro area, $118,000 in Britain, and $96,000 in Japan." ([12:00])

• Long-Term Growth Stability:
  "That growth rate that got to that $171,000 has been about 2% per year per capita GDP growth since 1860." ([13:15])

• Investment in R&D:
  "The US has invested a higher percentage of GDP in all things that lead to faster growth... including investments in leading technology and agencies like DARPA." ([14:40])

• Labor Market Dynamism:
  "The number of companies that are formed and dissolved in the year, about 20% of companies annually compared to only 15% in the European Union." ([16:25])

Stein emphasizes that the combination of high R&D investment, a dynamic labor market, and effective technology spillover has sustained the U.S.'s productivity edge.

Technology Spillover and Global Growth

Addressing concerns about technology transfer, Stein notes:

• Global Benefits from U.S. Innovations:
  "Due to technology transfer and knowledge spillover, the ability to use AI is available through most of the world... we can all benefit from that." ([18:00])

• Consistent GDP Growth Worldwide:
  "GDP per capita at 2% per year has been consistent across other countries, thanks to technology transfer and educational advancements." ([19:30])

This global dissemination of technology ensures that while the U.S. maintains its wealth, other countries also experience productivity growth, preventing a complete dominance by the U.S.

Risks: Overvaluation and Budget Deficits

Despite the U.S. stock market's impressive performance, Stein raises concerns about its current valuation levels and macroeconomic factors:

• Budget Deficits Impacting Corporate Profits:
  "An expanding federal budget deficit, which essentially has doubled over the past decade, has helped contribute to the 7.5% earnings per share growth for U.S. stocks." ([21:45])

• Potential Reduction in Deficit:
  "If the Trump administration's task force led by Elon Musk succeeds in reducing the budget deficit to GDP, there will be less income flowing to buy products and services by corporations." ([23:10])

• Overvaluation Indicators:
  "The US stock market makes up close to 70% of the global stock market but US GDP is only 26% of the world. The US stock market is the most expensive than it has ever been relative to the rest of the world." ([24:30])

Stein warns that the current premium on U.S. stocks, reflected in high price-to-earnings (PE) ratios, may indicate an overhyped market poised for correction.

Conclusion: Balancing Optimism with Caution

In wrapping up, Stein acknowledges the substantial gains from U.S. stocks but advises maintaining a balanced investment approach:

• Historical Lessons:
  "In 2000... growth stocks in this case were priced for perfection and they became imperfect. We had seven, eight years where value stocks outperformed growth stocks." ([25:10])

• Current Strategy:
  "We continue to have an allocation to US stocks both in our model portfolio examples on Money for the Rest of Us Plus I have it in my portfolio." ([25:30])

Stein emphasizes the importance of understanding underlying drivers and maintaining diversified, fact-based investment decisions to navigate potential market shifts.

Notable Quotes

• On U.S. Productivity:
  "Income per person depends on the total number of ideas ever discovered. And those ideas come from researchers, entrepreneurs, Scientists." ([14:55])

• On Corporate Profits and Deficits:
  "An expanding federal budget deficit... has helped contribute to the 7.5% earnings per share growth for U.S. stocks." ([21:50])

• On Market Overvaluation:
  "Rosher Sharma... said America is overowned, overvalued, and overhyped to a degree never seen before." ([24:50])

Final Thoughts

Stein concludes by reiterating the necessity of staying informed and adaptable in investment strategies:

• On Investment Confidence:
  "Understand how valuations added 3 percentage points to return strengthening dollar reduced non-US returns 2%. That's 5 percentage points per year over the past decade from valuations and currency." ([25:05])

• On Market Cycles:
  "Cycles change and that's why we share with you the data and provide tools for you like Asset Camp and a community like Money for the Rest of Us." ([25:40])

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