Are US stocks too expensive?

0:00Special note to listeners, we're very keen to hear your questions and answer them on the air. If you have burning questions about markets, finance, or the economy, send them to robert.armstrong at ft.com.

0:22Pushkin. USA. Heaven knows we've talked about it a few times on this show. But here's the thing. Some smart people are starting to worry that this whole US exceptionalism malarkey has gone too far. Today on the show, we're going to figure this out once and for all. We've got two questions. First, is this a bubble in the US? And second, can I get through this podcast without a huge coughing fit? There's only one way to find out. Stop it, Rob. Time is short. I could die at any moment. I know. Both of us. If we both die while recording this podcast, it's going to become a kind of classic. Yeah. I mean, that'd be a glorious way to go out on air.

1:07Anyway, hush. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in a rather dark and wintry London. Thank you so much to my very lovely colleagues, Josh Oliver and Chris Giles, for stepping in last week while I was in my sickbed. Joining me down the line from New York City is Mr. Robert Armstrong, master of the Unhedged newsletter, who is slowly emerging from his Thanksgiving food coma. It's true. I had a food coma and then I got a cold. So I've been in two different medical conditions. Is Thanksgiving basically just like a huge national germ-sharing exercise?

1:46Yeah, that's basically what it turns out to be. But you have it too. We both have it. Somehow it got across the Atlantic too, so we all got it. It's really going around. Everyone is ill. It's very, very boring. But the disease we're really interested in is bubble disease in the U.S. market. Bubble disease, the worst disease. So look, you do some talking while I rest my voice. Okay. Why can't we just have nice things, right? So U.S. markets are doing really, really well. So who is crying bubble? Why can't we just ignore them? Ruchir Sharma, who is an FT contributing editor, I think is the title, he writes a periodic column in the paper.

2:18A very good one. Very good column. basically came out and stomped his foot and said, the U.S. is in a bubble, a sentiment with which I happen to agree. So his point is a relative point. His point is that U.S. stocks are more expensive relative to global stocks than they've ever been since we've been keeping track of these sorts of things. The killer stat he uses is 70 % of global stock indexes of like the main global stock indexes is U.S. stocks. In the 1980s, it was 30%. And yes, we all know that the U.S. has some special strengths, but this has really gone too far. And I would add to his point that in absolute terms, U.S.

3:15stocks are about as expensive as they ever get. And you can use whatever model you want. There are some people who would argue with that. But by most measures, they're extraordinarily expensive and getting more so. I am one of the people who would argue with that, right? So there are two analogies that people bring up when they want to say this is all getting ridiculous. Abandon hope all ye who enter here. one of them is this smells quite a lot like japan like at a certain point japan occupied a massive proportion of the global stock universe and that all ended in tears the other is this all smells like the dot-com boom you have you've got like a smallish number yes big tech names that are just kind of flying up to the moon it's just not clear to me that either of these things really applies not least because these stocks, you know, you look at the kind of Nvidia's and Microsoft's of the world.

4:09They're doing incredibly well. Earn a lot of money. Earnings are doing incredibly, you know, what's to worry about here? The extremes aren't as extreme as the Japan and dot com case. The thing about those two cases is that you had individual asset classes in the case of real estate in Japan And individual stocks is in the case of like Cisco in the US, which were not at 40 times earnings. There were like 120 times earnings. You know, they were massively expensive. The famous thing like the Imperial Palace in Tokyo, the land it's on costs more than all the land in California or something. It was bonkers.

4:48And now is different in this respect because now it's like everything is quite expensive rather than a few things being mind-bogglingly expensive. So that is actually different. And look, another point we should bring up is that the U.S. does deserve a premium. Yesterday, I looked at the S &P 500 earnings expectations and compared it to the Europe S &P 350, which is like an equivalent big cap. And, you know, the growth expectations over the next couple of years for the S &P are kind of like 12 % earnings growth, which is pretty high expectations. And on the European equivalent, it's like 9%. So it's a little bit over a 2 % difference, 2 % to 3 % difference.

5:36Actually, a 2 % to 3 % difference in growth makes a big difference if it's sustained over time. In other words, you should pay a lot more for all else being equaled for an asset that's growing two percentage points faster than its competing asset, as it were. So, Rob, I'm sure you are a religious reader of every word that I write on the pages of DFT. So you will no doubt be aware that just the other day I was speaking to the BlackRock Investment Institute. You've been kind of research, brains trusting the book. Yes, very serious people over there. Very serious people, including Jean Boivin, who used to be at the Bank of Canada.

6:17You pronounce that beautifully, Katie. Thanks so much. It's my cold. It makes me sound really husky and sophisticated. But he was making the point that, you know, normally you look back to the past and you see this kind of gaping hole between where the U.S. is and where the rest of the world is. And in the past, you would say, OK, this is going to mean revert. Yes. And in the past, you would also say, OK, you've got whatever it is, 30 percent of the S &P 500 is taken up with a tiny number of stocks. Yep. This is going to mean revert. It's all going to spread out. But mean reversion only kind of works if if you're operating under a certain set of circumstances.

6:58What if what we've actually got here is a paradigm shift? Right. This isn't just a secular thing. This isn't just a kind of, you know, what point of the economic cycle are we in? This is there has been a breakthrough in technology, which is AI technology, which the U.S. is completely dominating. And this is not a thing that necessarily will kind of fall back into a place that we've been used to for the past 20 or 30 years. So actually, you know, it's not just him who's saying this.

7:32U.S. big tech is a really big call for an investor to make. It basically means you're saying, I just reject the premise of this entire technological revolution and I'm not in it. And that's actually quite dicey. You know, the safest thing to do for a lot of investors is actually roll with it. Just keep plowing into U.S. Man, it's tough. I got a couple of things to say. One thing is this difference between the United States and the rest of the world in terms of how much stocks cost, that started before the AI hype, right? Yeah. So something's been happening before chat GPT. So that's one point.

8:10And we can talk about what that is, whatever. The second thing is I'm a terrible hypocrite.

8:17So I have kind of normal stock portfolio, which is all made up of ETFs. In your family office, right? In my family office, staffed by one person, me, very occasionally checking in. And this is actually to the point, which is that a certain point some years ago, I had a properly diversified global portfolio, right? And because I am a lazy, shiftless journalist, I don't rebalance it like you're supposed to. With less money now. Yeah. I have not that much money, so it doesn't matter that much. And I just let it run. And as it turns out, this has been a great decision. If I'd rebalanced, I would have constantly been taking money out of the US ETFs and putting them into the global ETFs, which would have been a deadweight loss.

9:02So the result of doing nothing, as a result of doing nothing, it's all done great. And it's now massively overweight the US. So you might well ask me, Armstrong, if you think this is a bubble, why don't you sell those US stocks? Armstrong, if you think this is a bubble, why don't you sell those US stocks? Because I'm too scared. I feel like this bubble is going to grow much bigger. Yeah. Yeah. Like, why would you buy stuff that's cheaper just because it's cheap? Yeah. And like we have this new president coming in and that team of his everything they say, they disagree on a lot of stuff. But what they agree on is we are going to prioritize domestic economic growth over everything.

9:49we're going to massively deregulate we're going to make sure oil becomes cheaper we are going to cut corporate taxes it's going to be growth growth growth meanwhile the rest of the world is like going to get tariffs and it's like europe is trying to regulate everything to death and there's general disorder and dismay yeah you know yes you can say that in from the point of view of history i think it is true u.s assets are probably overvalued but i can't take the pain of being in cash until the valuations converge with the rest of the world i'm too scared i'm too big a wimp to make that call with my own money and you know who it is here that's important is TINA.

10:43TINA. We love TINA. Oh, lovely TINA. So the thing with TINA is that this was this like stupid markets acronym thing that people used to throw around when they were saying there is no alternative, right? T-I-N-A, TINA. Back in the day, there was no alternative to stocks because like bonds were rubbish. They yielded like nothing. So people got pushed further and further into riskier asset classes because TINA, because TINA, because TINA. and now Tina is kind of being wheeled out again Yes and with reference to the fact that there is no alternative to the US Yeah Like why would you waste your time investing anywhere else There are great opportunities in lots of other places There are It's just that that is the mantra at the moment And if you read we talked about this the other day you read what Wall Street is saying Tina is like a kind of euphoria right This is why I like Sharma's point is we're clearly in an environment where people are everybody is buying the America story in its entirety.

11:42Everybody is super psyched about it. Everybody is overweight, the US, everybody is scared to own anything else. So I, here's a question. So my, my prediction for what little, my predictions are worth is this bubble gets bigger before there's a correction. And it's interesting to think about what might be the thing that causes, I mean, it's famously impossible to do this, but it's fun to do all the same. What might be the thing that causes a reshuffling of the deck so that U.S. assets aren't so overvalued compared to everything else? Yeah, it's hard to think of anything off the top of my head. Here's a general candidate.

12:20Let's suppose that the Trump administration, Trump too, has its foot hardcore on the gas, right? On every respect that we just discussed. And although they talk a lot about how they're going to get the deficit under control, that turns out to be kind of hard to do, as I'm sure it will. And maybe they don't have the political will to do what needs to be done. So the deficit actually grows. The economy is running hot. And we have a significant reemergence of inflation. Inflation is hard to predict. If we learned anything from the last five years, it's that predictions about inflation should be taken with a massive container of salt.

13:07However, if that should happen, OK, now the U.S. has to tighten policy again or deal with inflation again. Right. And either way, that changes the relationship between the U.S. and the rest of the world in a fundamental way that maybe the Trump administration has to take their foot off the gas. Right. And they'll be faced with these hard choices and blah, blah, blah. And you can see the debt getting reshuffled. Combine that with a tariff war. You can see how on one possible future, you have a U.S. that massively outgrows the rest of the world for the foreseeable future. You have another possible world where the car gets out of control and swerves off the road, basically.

13:49Yeah. But yeah, I was talking to an asset manager person the other day about this and he was saying, you know, there is no US exceptionalism without US institutional resilience, right? Without the fiscal situation remaining kind of broadly contained. without lots of interference with the Fed, you know, all that sort of thing. So, you know, stocks are, they're not completely like bulletproof, but the bar is really high in terms of, you know, things would have to get really bad for investors to say, okay, I'm out. Yes. And ultimately, if it was tariffs or whatever it was that was exerting lots of pressure on the US economy, the rest of the world would likely be feeling the pain from that too.

14:33So you still end up, it's almost like whatever the question is, the answer is US, which feels like an uncomfortable place to be. But I think, I just think we're going to be there for quite a while. I agree. But, I mean, what does a bubble mean? A bubble means that at some point in the future, we don't really know, but not the ridiculously distant future. Let's call it five years. You look back at where US stocks are now, and you look at your own portfolio, and you think to yourself, man, I should have had more cash. Right. Yeah. Because shit blew up. And now I have a chance. If I had more cash, I'd have a chance to buy these assets now at a much cheaper price than I could have way back in December of 2024.

15:15Right. So in the next five years, are you going to look at your portfolio circa right now and think I should have had more cash? Yeah. And less U.S. stocks. I'm guessing it's hard. Like I said, if I believe this, I'd go today and I'd sell some U.S. stocks. So I guess I'm still on the fence, truth be told. So you think it is a bubble and it's going to keep on inflating. Yeah, and you're going to feel like hell if you get out now. Yeah. Yeah, you're going to feel like, oh, I've been so clever. Yeah. But look how much money I'm losing. But I tell you, I'm watching. And if we get another 20 % up on this thing, maybe I will think about massively cutting down my exposure to the United States.

16:00And I think we could get another 20%. But for what it's worth, I don't think this is a bubble. I think it's pretty rational. I think it just keeps grinding higher through the rest of the next year and this dispersion, this kind of divergence of the U.S. from the rest of the world. So let's set a date on which either you can say that I am stupid or I can say that you are stupid. I mean, I say that about you every day. I know, but we're talking about saying it on air. So I say two years from today. Right. I think that's what we're talking about. Things within two years, we're going to have a difficult disruption that makes us look back and say, I should have held more cash.

16:47Let's just delete that podcast. It may just look really stupid. All right. Fair enough. And so Christmas season 2026, either you will be calling me stupid or I will be calling you stupid out in front of God and everyone on this podcast. Fine. Listeners, what do you think? Who is the stupid one, listeners? Who's the stupid one, Rob or Katie? We actually, we really enjoy getting your feedback and getting your questions. And we try and loop as many of those questions into the pod as we can. So hit us up if you think one or the other or both of us are stupid. There's an email address that will reach the both of us.

17:25That's unhedged at ft.com. Drop us a line. Be nice. I'm going to grab a cough sweet and then we're going to be back in a second. Congratulations on not dying during the podcast. Thank you so much. There's still time.

17:43Alrighty, it's time for long short. That part of the show where we go long, a thing we love or short, a thing we hate. Rob, I'm going to go first because I think I might be about to lose my voice. And very obviously, I'm going to go short. This lurgy, whatever this bug is, I've got enough of it. Everyone is ill. It's a powerful one. On both sides of the Atlantic, everyone's ill. This lurgy can swim, apparently. Yes. What have you got? I am long Elon Musk's absurd$56 billion pay package. the court in Delaware said no you can't have it it was illegitimately granted I have a lot of respect for the Delaware chancellery court and I wouldn't want to cross them but I think once a board acts stupid and writes a very stupid pay agreement that ends up giving the CEO 56 billion dollars they have to give the CEO 56 billion dollars this is a legal knows if someone Someone wrote down somewhere that they're going to give me$56 billion.

18:49Yes, ma 'am. I would pursue that. This is an ancient principle of the common law called no givesies, no backsies. And I really do think it's a matter of incentives. Nobody can protect a lazy and shiftless board, which is clearly what Tesla had from itself. And the courts shouldn't try. So give him the money. They got to. Is that what you're saying? Learn their lesson. That'll teach them. what a world listeners assuming we're not all dead we will be back in your podcast stream on Thursday so listen up then Unhedged is produced by Jake Harper and edited by Brian Erstad our executive producer is Jacob Goldstein we had additional help from Topher Forges Cheryl Brumley is the FT's global head of audio special thanks to Laura Clark Alistair Mackey, Greta Cohn and Natalie Sadler FT Premium subscribers can get the Unhedged newsletter for free.

19:45A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.