#MacroFriday: Fading US Exceptionalism Could Diminish US Valuation Premiums

Despite recent declines, US equity valuations remain elevated compared to their 35-year historical averages. As the narrative of US exceptionalism begins to unravel, these valuations may come under further pressure.

The concept of US exceptionalism was built on sustained economic outperformance, higher corporate profitability and a stable, capitalist business environment. These qualities fostered a deep-rooted confidence in US assets. But that perception is beginning to crack. Unconventional policy measures are creating an uncertain and volatile investment climate. A tariff-fuelled trade war is not a zero-sum game, and concerns about US economic growth persist as both consumer and business sentiment wane. Investors are questioning whether the valuation premium assigned to American assets is still justified.

Evidence of the decline in US exceptionalism is increasingly apparent: Long-term Treasury yields have risen while the economic outlook has deteriorated, government debt continues to mount, US equities have underperformed since ‘Liberation Day’, and most critically, questions are emerging about the reserve status of the US dollar.

Even after the recent equity pullback, valuations of American companies remain notably above their historic averages. Meanwhile, this metric points to cheaper valuations for global equities ex-US, significantly below their historical averages. While much of the attention in US equities focuses on the valuations of the tech giants, this isn’t just a TMT (Technology, Media, Telecom) story. Excluding TMT stocks, the forward P/E ratio of US equities still sits at 18, which is well above the 35-year average of 16,2. These valuations are highly sensitive to earnings downgrades and the persistent erosion of US exceptionalism, suggesting that another leg down for US equity cannot be ruled out.