Investors have good reason to favor U.S. assets: Over the past decade, U.S.-listed stocks have dwarfed their international rivals, generating returns more than double those of stocks in other parts of the world.
But past performance says little about the future. The question now is whether Wall Street can remain the obvious choice for investors over the next decade.
In my opinion, that is highly unlikely, and I would like to give you four reasons why you should hold back on investing in the United States.
The first is valuation. By global standards, U.S. stocks are currently very expensive relative to economic fundamentals.
The difference with foreign stocks is big: U.S. stocks trade at 23 times earnings, compared with just 14 for European stocks. Dividend yields are just 1.2% compared with a much higher 3.2% for Canadian stocks.
Why U.S. stocks are so expensive relative to their international rivals is an intriguing question: In some cases, tech dominance is the culprit, but in other cases, high valuations on Wall Street seem to simply reflect a general euphoric mood.
Consider the recent excitement surrounding boring Walmart Corp. Over the past year, shares of the retail giant have risen more than 34%.
Is it possible for a company as large, mature, and long-standing and highly esteemed as Walmart to be worth a third more than it was 12 months ago? There’s good reason to be skeptical. Walmart didn’t reinvent the wheel; it just got a little lucky in attracting premium shoppers. But at about 30 times earnings today, it’s priced like a hot growth stock.
Indeed, the frenzy driving Walmart’s stock price seems almost tame compared with the euphoria that’s swirling around all things AI.The high expectations for artificial intelligence provide a second reason to be cautious about Wall Street’s future.
Three AI-related stocks — Nvidia, Microsoft and Apple — currently account for more than 20% of the S&P 500. All three have surged this year on hopes that they will benefit from growing public interest in artificial intelligence.
The problem is that no one is sure how AI will change things, or whether it will change things at all. Jim Covello, head of global equity research at Goldman Sachs, is among the skeptics.
In a recent report, Covello argued that AI is expensive and currently not as useful as people think it is. AI does not yet have a simple, obvious use case that will save time and money for those who use it. Covello said that if we don’t see a strong use case for AI by the time of the next recession, AI stocks could fall significantly.
Whatever happens with AI, Wall Street is also vulnerable to a more subtle, non-technical threat: the possibility that the U.S. economy is not as strong as investors currently assume.
The consensus now is that inflation will return painlessly to target and growth will continue smoothly with no signs of a recession. But cautious investors may see a third reason to be cautious about U.S. stocks given how much this bright outlook depends on the federal government’s continued willingness to pump money.
Washington is essentially running wartime deficits in peacetime. Huge deficits, more than 6 percent of the economy, are helping to inflate corporate profits for now. But if markets are unwilling to absorb the massive amounts of debt Washington is now issuing, the deficits may have to be reduced, with adverse consequences for corporate profits.
To be sure, the deficit outlook is politically charged. A final reason to be cautious about U.S. markets is the unpredictability of the presidential election in November.
As it stands, we’re pitting a convicted criminal against a frail old man. Neither seems like a good option, but if Donald Trump is elected, markets would face great uncertainty about whether he will follow through on his promises to erect new trade barriers and gut much of Joe Biden’s industrial strategy and climate policy.
Investors may want to take a step back from this turmoil. Though it’s currently buoyant, the U.S. stock market is expensive and politically unstable, fueled by the AI ​​craze and huge budget deficits. Now is a good time to start moving money into cheaper, less volatile markets.
