To The Moon

$.SPX(.SPX)$

The concept of America as an exceptional nation, superior to its competitors and therefore destined to lead the world, seems outdated to many. In political, diplomatic, and military circles, the discussion centers on a dysfunctional superpower, increasingly isolationist abroad and divided at home. However, in the world of investing, the term “American exceptionalism” is more popular than ever.

United by their belief in the strength of U.S. financial markets and their ability to outperform all other economies, global investors are pouring more capital into the U.S. than ever before in modern history. The U.S. stock market now stands above all others, with relative prices at their highest since data began over a century ago, and relative valuations peaking at levels not seen in the past 50 years. As a result, the U.S. now accounts for nearly 70% of the leading global stock index, up from just 30% in the 1980s.

The dollar, by some measures, is valued higher than at any time since the developed world abandoned fixed exchange rates 50 years ago. The prevailing consensus is that the disparity between the U.S. and the rest of the world is justified by the earnings power of top U.S. companies, their global influence, and their leadership in technological innovation. These strengths are real. But one definition of a bubble is a good idea that has gone too far, and the admiration for “American exceptionalism” in markets has now crossed that line. America’s share of global stock markets far exceeds its 27% share of the global economy.

The imminent return of Donald Trump to the White House has further fueled this disconnection. Investors believe his proposed tax cuts, regulatory rollbacks, and tariff increases will continue to inflate U.S. markets, which have outpaced the rest of the world since the global financial crisis.

Following Trump’s November victory, the U.S. posted its strongest month of out performance yet. It feels as though America is the only country worth investing in. While traveling through Asia and Europe, I consistently encounter investors who are captivated by the global giant.

In Singapore, financial advisors are urging their clients to diversify outside of Singapore by buying into the one market that’s even more expensive: America. In Singapore, at a lunch with wealth managers, the host asked, “Is there anyone here who does not own Nvidia?” Not a single hand was raised. This is not a bubble in U.S. markets; it’s a global mania. At the height of the dotcom bubble in 2000, U.S. stocks were more highly valued than they are today. But back then, the U.S. market didn’t trade at nearly such a vast premium over the rest of the world.

This isn’t merely AI mania under a new name. When looking at indices that weight stocks equally and account for Big Tech’s dominance, the U.S. has outperformed the rest of the world by more than four to one since 2009. Some of the premium is rational. The U.S. economy is growing faster than those of Europe and Japan, though slower than many developing nations. Yet, it commands a premium not seen since the financial crisis that hit emerging markets in 1998.

America’s appeal in global debt and private markets is also stronger than ever. So far in 2024, foreign investors have poured capital into U.S. debt at an annualized rate of $1 trillion, nearly double the flow into the Eurozone. The U.S. now attracts over 70% of the $13 trillion global private investment market, which includes equity and credit.

While many believe the world is becoming more multi polar, investors view it as increasingly uni polar — and they see the markets as a zero-sum game. In the past, including during the 1920s and the dotcom era, a rising U.S. market would help lift other markets. Today, a booming U.S. market is siphoning money away from others.

Investors continue to believe that fundamentals drive prices and sentiment. But eventually, sentiment can drive fundamentals. When capital leaves smaller markets, it weakens the currency, forces central banks to raise interest rates, slows the economy, and worsens the nation's fundamentals.

Talk of bubbles in tech, AI, or growth-focused investment strategies distracts from the true “mother of all bubbles” in U.S. markets. Dominating the thinking of global investors, America is over-owned, overvalued, and over hyped to an extent never seen before. As with all bubbles, it’s difficult to predict when this one will deflate or what might trigger its decline. But I will explore some potential scenarios in my next column.

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