The more expensive U.S. stocks get, the more they rise: what new logic is behind this?
The U.S. stock market is valued higher than major global markets, mainly due to growth expectations, dominance of tech stocks, and liquidity. Investors are buying high-priced stocks in large quantities, and the S&P 500 index is expected to continue its strong rebound. The earnings growth and high price-to-earnings ratios in the tech sector are driving the strength of the U.S. market, attracting more passive investment funds. Despite valuations being at historical highs, long-term growth confidence remains strong.
Barrons reports that the valuation of the U.S. stock market is significantly higher than that of other global markets, which is partly due to growth expectations, the dominance of the technology sector, and the enormous liquidity in the market. This trend is likely to continue.
According to a report by Capital Economics, the high valuation premium that investors are paying for U.S. stocks is largely justified. The largest investors continue to buy heavily into the higher-priced stocks in the market while avoiding lower-priced alternatives.
This likely means that the S&P 500 index can extend the strong rebound momentum from the spring and summer seasons into the last few months of this year. Even if traditional valuation metrics indicate that stock prices are already above the levels that corporate profit growth expectations can support, the stock market is still expected to continue to rise.
"We believe that improving risk appetite, the resilient performance of the U.S. economy, and the continued advancements in artificial intelligence technology will bring tailwinds to the technology sector for the remainder of 2025."
"James Riley, a senior market economist at Capital Economics, stated, "In this situation, it is hard to imagine anything that could detract from the earnings performance of the U.S. technology sector." Riley believes that the earnings growth of the technology sector, along with the significant weight of the largest stocks in the sector in the U.S. large-cap indices, are key factors driving the rise in valuations in the U.S. domestic market.
Taking the MSCI USA Index, which tracks about 544 stocks, as an example, Riley pointed out that the premium investors are currently paying to hold U.S. stocks is at least the highest it has been in the past 25 years compared to the indices of 20 other countries.
The MSCI US Index currently has a price-to-earnings ratio of about 23 times the expected earnings of its constituent stocks over the next 12 months. This is roughly in line with the price-to-earnings ratio of the S&P 500 Index, which closed at a record 6501 points on Thursday. Since Liberation Day, the index has risen nearly 30%, while the overall expected earnings of the S&P 500 Index have only increased by about 5% during the same period. LSEG's latest estimate puts it at $283.34.
Riley stated that compared to overseas markets, the overall scale and liquidity of the U.S. market are larger, which attracts more passive investment flows, such as index funds. This provides continuous support for the market and also explains some of the differences.
"In addition, the number of companies included in the index means that, all else being equal, investing in the MSCI US Index can achieve higher diversification benefits compared to investing in indices from other regions," he wrote.
Riley stated that the high premium on U.S. assets likely reflects the market's confidence that corporate earnings will continue to grow beyond the usual 12-month benchmark used for global stock market valuations. "In other words, while it may seem at first glance that investors are paying a premium for U.S. assets, they may actually just be willing to pay for superior long-term growth."
He said. The latest data from American banks suggests that this view may be supported. The bank's quantitative strategy team pointed out that, compared to the S&P 500 index, long-term investors have higher holdings in five of the "seven giants" technology stocks, excluding Apple and Tesla, than the benchmark. Similarly, these investors have a holding ratio in non-"seven giants" ordinary stocks that is about 20% lower than the benchmark, even though these stocks have price-to-earnings ratios significantly lower than their larger peers, appearing "cheaper."
Lori Calvasina, the head of U.S. equity strategy at RBC Capital Markets, believes that investors prefer technology and growth stocks because they bet that these stocks are less affected by tariffs and will perform better during economic downturns. She stated in a report released on Friday:
"Compared to 2023, the gap in earnings per share (EPS) growth between the 'Seven Giants' and other S&P 500 constituents has narrowed, but the 'Seven Giants' still maintain a leading position - they have not relinquished dominance in expected future earnings."
It is expected that by 2026, this gap will drop to a low point, but by 2027, the advantage of the 'Seven Giants' will slightly increase again.” Calvasina also pointed out that since the low point after the Liberation Day holiday in early April, the MSCI US Index has outperformed its European, Asian, and Australian peers. Reilly from Capital Economics stated that this trend is likely to continue, even as investors continue to buy at high prices to participate in this rising market. "We expect that in the coming year, the valuation of the MSCI US Index will continue to be higher than that of most peers, which will help the US stock market outperform other markets during this period," he said.
