Since the stock market’s 18.9% pullback during the tariff-tantrum in early April, it has had one of the fastest rebounds on record. The S&P 500 is up more than 10% in Q2 (which includes ugly April). The tech-heavy Nasdaq 100 is up about 18% and semis are up more than 30%. However, market gains have not been even. Growth stocks are trouncing value stocks, dividend stocks are down, and the all-world ex-U.S. ETF is handily outperforming U.S. stocks.
The market usually provides lessons to investors who are paying attention. We can think of two so far in 2025. First, stay the course during scary periods of investing. The market always goes on to new highs (there are no exceptions). Second, Mr. Market loves serving humble pie to investors that think they have it all figured out. We should all stay humble because the market is not at all predictable.
After the quick snap-back in share prices, bears point to overvaluation as one of their key arguments, which we will now address. While top-heavy indices (like the S&P 500) seem aggressively valued at 21.5x forward earnings, the typical stock is another story. After removing the Mag 7 from the S&P 500 (which have higher growth projections and higher valuations) the equal weighted S&P 500 index is selling at about 18-19x, the average valuation over the last 10 years. And this is about the same multiple as the 2010s. The “average” S&P 500 stock is not overvalued, in our view.
The third year of a bull market (this year) is usually modest, especially after two strong years like we had in 2023 and 2024. The third year is often a recharge for further gains in years four and beyond. Rallies beget rallies. And remember there is $11 trillion sloshing around in U.S. money market funds looking for a permanent home. The bull market rolls on.
IS AMERICAN EXCEPTIONALISM DYING? NOT A CHANCE
Financial pundits are sending a clear message: American exceptionalism is over. This sentiment stems in part from the outperformance this year of most foreign equity markets compared to our S&P 500. (Our markets have dominated world markets since the 2008-09 Financial Crisis, until 2025.) It also reflects a deep unease over fiscal concerns – U.S. debt has hit $37 trillion. And tariffs threaten global capital flows into U.S. markets. Are cracks forming in the reliable U.S. economy?
U.S. exceptionalism isn’t just about stock market performance. Rather, the U.S. economy’s dominance reflects a persistent structural advantage on how it generates growth and productivity gains, sales innovation, attracts capital, and converts all this into corporate profits. This is not likely to change anytime soon.
Let’s start with gross domestic product, the engine for corporate profits. Since 2010, growth in Europe has been about half the U.S., and Japan about one-third (source of all statistics in this commentary: BNY Wealth Management).
Relaxed regulations are a clear advantage of the U.S., just as overregulation of labor and business formation has been to Europe’s detriment in long-term growth. For example, the unemployment rate in the U.S. is 4.2% compared to 6.2% in the Eurozone. And new business applications have nearly doubled in the past 10 years in the U.S., compared to 26% in the Eurozone. Capital and good ideas are rewarded better in the U.S.
Also, the productivity rate since 2010 of U.S. workers is double that of the Eurozone, Canada, and the U.K. This productivity gap has accelerated since 2019 and will likely widen further due to U.S.-led artificial intelligence innovation.
The vast amount of seed and venture capital to fund innovation isn’t available elsewhere. More than 60% of U.S. households own equities through brokerage accounts, IRAs, and 401(k)s – a level unmatched in other markets. This makes U.S. markets the only ones big enough to absorb global capital flows. The U.S. accounts for 64% of global equity market capitalization and 41% of global investment-grade fixed income.
For the corporate sector, capital has a far higher return in the U.S.: the S&P 500 return on equity is 21% compared to 13% for the European market.
What we are seeing is simply a pause in U.S. outperformance, not a sustainable about-face in financial dynamics. We are not seeing a structural change and shouldn’t confuse sentiment with fundamentals. To reiterate: U.S. exceptionalism isn’t just about stock performance. Our nation’s dominance reflects a durable structural advantage.
Although we are a U.S.-centric equity investor, we are not averse to buying an international stock if the fundamentals and valuation are attractive (through ADRs, or American Depository Receipts). In addition, many of our U.S. picks are multinationals, so we are participating in foreign economies. However, we plan to continue to focus on the world’s best market – the U.S.