Does the nascent “buy Europe” theme have any staying power?
It depends. On whether the place is invaded, conquered and its people assimilated into Russia via a vodka and borscht gavage.
I’m just kidding. But not entirely. A lot does depend on the security landscape which looks quite bleak at present. On Monday, for example, the US — and this is true — voted with Belarus and North Korea against a UN resolution condemning Moscow’s aggression in Ukraine. “Surreal” is a wholly insufficient adjective.
Geopolitics aside, the fundamental outlook for European equities is actually improving on some metrics, both in an absolute sense and relative to the US. “Overall, the upgrades ratio is weaker in the US than in both Europe and Japan,” SocGen’s Andrew Lapthorne noted on Monday.
The figure above illustrates the point. Lapthorne gently reminded investors that US shares trade at a 60% P/E premium to the rest of the world.
Morgan Stanley’s Mike Wilson made a similar point in his latest. “Amid [the] debate about the US growth landscape, investors have begun to question the sustainability of the ‘US exceptionalism’ investment narrative,” he wrote.
Remember: US exceptionalism wasn’t just the consensus at the start of 2025, it was viewed as a kind of newly-consecrated natural law. I’d humbly remind readers that I questioned it openly just three weeks ago when I asked, “Is The 2025 ‘Buy America’ Credo Too Consensus To Be Right?”
Recall that nearly six in 10 PMs in a Goldman poll expected US shares to be the best-performing asset in 2025, up a remarkable 26ppt from 2024, and a mile beyond any expressed preference for US shares recorded by the same survey going back to 2018.
Wilson on Monday said the viability of the US exceptionalism theme’s “come up in the vast majority of conversations we’ve had with clients over the past several weeks,” a period during which European equity funds saw their largest inflows in years, and Chinese tech shares stormed into a bull market.
“Interest in China is more centered around the tech sector post the DeepSeek news flow [but] in Europe, there appears to be fundamental support for the outperformance we’ve seen recently from the region,” Wilson went on. The figure on the left, below, gives you some context for earnings revisions breadth. It’s picked up meaningfully for European shares and decelerated for the S&P.
And yet, as the figure on the right shows, the long-term outlook’s still brightest for US companies, which in theory justifies the valuation premium mentioned above.
“In our view, we’ll see capital rotate back to the S&P 500 for the straight-forward reason that it’s the highest quality index among global peers,” Wilson wrote, adding, of US big-caps, they command the highest valuation because they have “the best earnings growth prospects.”
Of course, that assumes the long-term growth expectations of analysts (which are informed by management teams) are borne out. To be fair, that’s probably at least as safe a bet as the assumption that Putin won’t invade the rest of Europe.
My money is on the US economy, which underwrites the stock market. More specifically, I am betting on the top 10% of US earners (households earning over $250k/yr.), that are responsible for 49.7% of all spending – a record since 1989.
Basically, keeping the “rich” rich enough to keep spending should keep US equities propped up. (See WSJ article published yesterday in the online edition).
US high earner consumption has a high corelation to risk assets, that means, stocks, bonds, real estate and small business. It can evaporate quickly if confidence pulls back and credit tightens. It’s a bet. Maybe it works maybe it does not. It’s a gamble I would not want to take for the country as a whole if I were making policy.
I’d be curious to see the spending splits based on partisanship. We see individual perspectives, especially on the economy, colored more and more by politics. My guess (based on education levels and geography e.g. blue cities) is more of the spending in that top 10% is weighted toward people who voted for Harris with the exception of business owners who may separately be feeling the pinch of policy uncertainty. Not that I’m placing any particular bets myself, but to me, the case for international equities might be more about protecting against downside risk.
One thing we know about Trump is he brings chaos that increases risk. Businesses don’t like uncertainty and my gut says the US consumer doesn’t like it either which means spending will slow on most fronts. Add into the mix a global leader who has bankrupted most everything he touches. His first term in office his whims were dampened in most cases, but with Project 2025, the richest man and a cadre of extremists he’s free to impose his insanity on the world. Where will we be when the global order is completely flipped, all attempts to slow climate change have stopped, millions are unemployed, millions more deported, and millions want to emigrate while the person driving the big beautiful bus is focused on retribution and selling everything that’s not nailed down. If the US comes out of this storm with a roof over our heads, we will need a system that keeps us from making 180’s every 2 to 4 years. The global system will implode if we don’t.