20-05-2025
Undimmed United States ‘exceptionalism' seems improbable
WITH heads still spinning from Wall Street's 180 degree turn over the past six weeks, investors are sceptical over still 'exceptional' US stock market valuations that have barely flinched.
Few doubt a de-escalation of Washington's trade war – for the next month or two at least – defused a panic.
The over-caffeinated waxing and waning of recession warnings speaks to that even if US import tariffs are rising regardless.
But the re-inflation of extreme relative US equity valuations can only be warranted if US 'exceptionalism' is truly unscathed.
And here's where the story seems improbable, especially if you assume the administration's stated goal of upending the status quo that existed prior to its term. Business as usual is not part of the policy design.
On the face of it, the S&P 500 is back in positive territory for the year for the first time since February, remarkably less than 4% from its all-time high from February.
The VIX 'fear index' of equity volatility has subsided to the lowest since March and back below its long-term average.
And before you think that's all just a mega-cap tech rebound, the equal-weighted S&P 500 is also back in the black for the year too.
Both had been down 12% to 15% for the year shortly before April 8's 90-day pause on the draconian 'reciprocal tariff' plan of a week earlier.
There are several reality checks to that, however.
The tech-heavy Nasdaq, small-cap Russell 2000 and exchange-traded funds in so-called Magnificent Seven top caps remain in the red for 2025 to the tune of 2% to 6%.
More crucially, the S&P 500 itself is still underperforming MSCI's all-country index by some 3% for the year so far.
And, with the dollar down about 6%, it lags Germany's DAX, the broader eurozone benchmark and Hong Kong's Hang Seng by anywhere between 15% to 30% in dollar terms for 2025.
Double GDP
But it's the valuation rebound that arguably causes most puzzlement with so much of the economic and policy disturbance left unresolved.
The S&P 500's 12-month forward price to earnings multiple has jumped back above 20.
Although still off February heady peaks over 22, it continues to surf almost 20% above its own 30-year average, more than 40% above equivalent European STOXX 600 valuation and more than 60% above the MSCI emerging markets index and Britain's FTSE 100.
That still spells exceptional in most people's books and has to assume those revised US recession warnings remain under wraps and 'value investors' don't get tempted away, or back home, in the case of the trillions of overseas dollars in the market.
'Those with sympathy for the Make America Great Again ambitions and methods could believe US exceptionalism will continue to deliver high returns, with strong capital inflows representing a willingness to hold and increase dollar holdings amongst investors in the rest of the world,' mused Chris Iggo at AXA Investment Managers.
'Recent events might cast some doubts on those assumptions.' Iggo wrote that the only meaningful factor that had improved of late was sentiment and relief, driven in part by announcements of billions of dollars in deals done by President Trump on his Middle East tour last week.
'Sentiment is fickle though. It could turn sour when the reality of weakening economic data becomes evident,' he added.
As to whether US market pricing remains extreme, Iggo cast back to legendary investor Warren Buffett's indicator of excessive valuation being defined by how much overall market cap exceeds a country's gross domestic product (GDP).
Using the Wilshire 5000 as a measure, US equity market cap is now more than 200% of GDP – twice where it was a decade ago, twice that of France or Britain and more than 50% bigger than the same ratio for Japan.
Even if US recession is avoided, the overarching Trump plan to rebalance world trade with higher tariffs, narrower US deficits, a countervailing capital flow reversal, weaker dollar and domestic demand spurs overseas challenge that market exception.
Some point to enduring long-term themes of US tech leadership and innovation. But even if faith in that persists, the current disruption has multiple hurdles over the summer ahead.
July and August stand out as particularly tricky months. Ninety-day tariff pauses on global and Chinese tariff hikes expire in July, the 180-day review of US membership of all multilateral institutions comes up that month too and the deadline for raising the US debt ceiling drifts back onto the radar amid currently fraught budget negotiations.
On top of that, the Federal Reserve's best guess on when tariff rises start to infect inflation in earnest is June – numbers set to be published in July. And even in most investors' best-case scenario of 'only' a 10% universal tariff increase, the risk there is that it resolves little.
'Settling on a 10% tariff might ... be the worst of all worlds-from the perspective of Trump's objectives,' wrote Council on Foreign Relations president Michael Froman.
'It could be too low to raise substantial revenue, too high to avoid pushing up prices, but not high enough to re-industrialise the United States.' — Reuters
Mike Dolan is a columnist for Reuters. The views expressed here are the writer's own.
