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"Persistent outperformance of U.S. equities" from "valuation expansion" not fundamentals

WABACWABAC
edited July 18 in Other Investing
Over at M* Larry Swedroe looks at AQR research.

I'll cut to some factoids he mentions:
For the 35-year history ended December 2024, they found that US equities outperformed non-US developed markets by 4.7% per year, with 3.8% attributed to relative valuation expansion, 1.1% to real EPS growth, negative 0.6% to dividend yield differential, and negative 0.3% to real interest rate differential.
They found that to justify current valuations, US equities would need 2.2% higher annual real earnings growth than non-US peers over the next decade—well above the historical 0.3% edge.
From the end of 2008 through 2024, the US dollar rose in value relative to the euro from 0.72 to 0.92, an increase of almost 29%.
Well, what's it all about? I suppose it depends on your feelings about recency bias vs. mean reversion. After all, US indexes are setting records ain't they?

Comments

  • hank
    image
  • Old_JoeOld_Joe
    edited July 18
    "Persistent outperformance of U.S. equities" from "valuation expansion" not fundamentals" would also have been a good headline back in 2007 just before the market collapse.
  • davidrmorandavidrmoran
    Boy is valuation expansion a great phrase: no more punchbowl, greater fool, froth, bubble, overbought ... 4th-highest SP500 p/ ever and 2nd-highest Shiller. Party on.
  • Old_JoeOld_Joe
    :)
  • Sven
    @Old_Joe, so true, just before the market collapsed. Took several years for us to fully recovered. Only asset stay afloat was cash, but we had a small allocation.
  • hank
    edited 10:40AM
    Not sure know which “market” the following numbers represent. But I dug them up in Stack’s latest newsletter. Possibly the S&P 500?

    From James Stack (July 18): Current Market Price-to-Earnings 28.3 / Average since 1928 17.7

    I’ve checked with M* and found that the P/E for the equity holdings of OAKBX which I recently bought at 13, with the average P/E for this class of funds at 20. (Fund has over 40% in fixed income.)

    For reference, LCORX (which I don’t own) comes in at a P/E of 16 according to M*, again with its peer group at 20.

    I realize P/E can be measured in different ways and that there are several other measures of market valuation besides P/E. Stack notes several other valuation metrics, all indicating an expensive market.

    Bottom line: Are there some funds that might hold up well during a market rout, even considering the apparent “bubble” more generally speaking? ISTM after the March 2000 “Tech Wreck” many other markets recovered in a year or two’s time compared to the NASDAQ which remained below its 2000 high for many years.
  • DrVenture
    I wonder if the recent outperformance of international stocks can continue and begin to reverse this circumstance?
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