On Sunday evening, ahead of Thanksgiving week in the US, I wrote that “for all the hand-wringing over the allegedly imminent end of American hegemony, I don’t see a lot of viable contenders” for the country’s top spot in the geopolitical and global economic order.
In the same short editorial, I cited the best-performing economy on Earth and an equity market that accounts for nearly three-quarters of global market cap.
The irony of America’s existential crisis is that on some metrics, the country’s never been more dominant. In a Monday note, Morgan Stanley’s Mike Wilson quoted a client who said,
Ten years ago, for every five high-quality US companies, I could find one outside the US; now that ratio is 10 or 15 to 1.
You’ve probably heard the “TINA” acronym applied to the US equity market frequently of late. That’s why. For professional money managers, there really aren’t much in the way of alternatives, and finding the exceptions is getting harder all the time.
In the same note, Wilson underscored the point with the figures below. The scatterplot on the left gives you a sense of how anomalous big-cap US equities really are through the lens of long-term growth expectations (click to enlarge, as always).
Long story short, there’s nothing anywhere close, and those lofty expectations explain the multiple. “Despite the S&P 500’s near-record-high valuations, the consensus view remains that they are justified by the also-high ROE and better growth profile,” Wilson wrote.
Of course, those are just expectations. They may or may not be realized, and it’s important to remember that a big part of the dot-com bust was a sudden realization that long-term growth expectations might’ve been too optimistic. As Wilson put it, “the market is now pricing [the] relative growth differential, so that relative strength must be maintained going forward.”
Look at the simple, but remarkable, chart on the right (above) and specifically at the near 90-degree inflection circled in red. I’d say “there’s US shares and then there’s everything else,” but at this point, it’s more like “there’s US shares and nothing else.”
I wonder what will happen to the multiples of the Mag 7 when people start to realize that the prospects for AI are much greater in the eye’s of CEOs than in the eye’s of the engineers working on the technology. Current AI, like ChatGPT, is really bad at getting details correct. It gives bad (wrong) recommendations for how to implement solutions to technical problems. It also gives, very authoritatively, incorrect information regarding US Government policies.
I have been using AI to find scholarly articles for use in an academic publication. I have found it helpful, but it takes some engineering of queries to get reasonable reasults.
However I also think we are on the cusp of a multi-decade boom (to quote and unquotable) ‘the likes of which we have never seen before’. We are an energy intensive society that is just learning how to do chemistry right. In my career we used brute force. We are not at the start of a boom using catalyst routes to make basics for our society. This will lower energy requirements on top of seeing lower energy costs from solar power. Do you think it is a coincidence that an oil power attacked to start WWIII just at the start of a new energy era? No I think out of desperation, Vladimir has attacked. Not only attacked with bombs but also attacked with electioneering. We either wake up to this world or it will come a knocking at our door. Oh I guess that wake up call is me too, we just elected an orange thing that Vladimir controls that is hell bent on destroying the USA.