A shift in direction: Is the US stock market's uniqueness over?

In 2025, US stocks fell short of global averages

Is this an indication of an impending change?

If everything goes according to plan between now and the new year, 2025 will prove to be a far better year for stocks than it appeared likely eight months ago. Early in April, there was a significant sell-off in US tariffs, but the decline ended sooner than anticipated, and markets quickly recovered.

Despite all of Donald Trump's rhetoric, the truth is that he changed his mind about the amount of tariffs. To appease him, foreign governments signed a number of agreements, including numerous trade and investment commitments that they will try their hardest to break. The monetary policy of central banks started to loosen a little more. As a result, stock prices increased once more. The MSCI ACWI index, which comprises both developed and emerging markets, returned an impressive 18% in local currency terms (including net dividends).

The full impact of the tariffs is probably still being felt. Additionally, it is conceivable that the Trump administration will eventually: a) realize that the rest of the world has no intention of genuinely sending hundreds of billions of dollars more into the United States; and b) begin to worry about some early indications of a slowdown in the sector of the economy that is not driven by AI spending. At that point, it might choose to launch a new trade conflict with Europe and China. But in the meantime, things are going as usual.

A long-term perspective on US stocks.

However, something is distinct. The performance of US stocks this year has been above average, returning about 16%. That is, however, well below many European nations (including the UK), Japan, and emerging markets, and only marginally in line with Europe. Additionally, keep in mind that this is in terms of local currency; when the US dollar declines, investors have performed better in nearly every other market. This is the opposite of what most strategists anticipated at the beginning of 2025 and contrasts with recent American outperformance.

US stocks with an MSCI net total return.

We don't know if this will occur again the following year. On the other hand, we can observe that the MSCI USA index is trading on a forecast earnings yield of about 4.5 percent, which is calculated by dividing earnings by price. The earnings yield on the MSCI Europe index is more than 6.5%, the MSCI Japan index is about 6%, and the MSCI Emerging Markets index is slightly less than 7.5%.

Theoretically, expected longer-term real returns can be directly represented by the earnings yield. A higher yield should result in stronger returns because earnings are either reinvested by businesses to spur growth or returned as dividends. Although reality is never that straightforward, it is indisputable that the US will need to continue outperforming the rest of the world in terms of earnings growth in order to overcome the drag of beginning on a lower yield.

In light of this, there is a good chance that the rest of the world will continue to outperform for a considerable amount of time. This explains why, despite the US's impressive historical performance, our asset allocation portfoliowhich I will be reviewing sooncontinues to underweight the country. It's possible that the call is finally beginning to benefit us.