US Exceptionalism

The only game in town

After putting in a 24% return in 2023, so far this year the US Standard and Poor’s 500 Index ($SPX) is up a stellar 28% – since 1990 only three years had a better showing: 1995, 1997 and 2013.

Markets showed their overwhelming approval of Donald Trump as POTUS with a record $180 billion November inflow in US equity ETFs and mutual funds.

Crypto fund flows also surged as the Trump administration is seen to be friendly to the asset class.

Here’s the scorecard since the November 5 election:

With Trump’s MAGA push the US Dollar has once again surged and the rest of the world (ROW) has suffered outflows especially Emerging Markets which are also grappling with geopolitical risks once again with Trump’s protectionist stance.

Mag 7 Shines Again

The biggest winner and driver of the US market is hands down the “Magnificent 7” stocks again. The NYFANG Index is up 55% in 2024 and 225% since 2023! Looking at the chart below it seems to be going parabolic recently with a clear acceleration of its long uptrend.

I have a few data points here to show how big of an influence these 7 stocks are.

To give context to how big the US market is versus the rest of the world check out the weight of US equities in the FTSE Global All Cap Index!

What’s behind the “exceptionalism”?

The valuation of the US Standard and Poor’s 500 Index ($SPX) is actually at the top 5% percentile rank in history and the gap versus the rest of the world has grown huge – US exceptionalism.

Another perspective is to just look at the flows over the past few years alone. Since COVID-19 hit in 2020 there have been $1.1 trillion inflows into US equities versus only $233 billion for the rest of the world.

On US technology stocks they are actually close to 30 times P/E – a level last reached in the DotCom bubble of 2000 and way above historical norms.

As we always preach, markets are efficient and stocks are usually expensive (or cheap) for a reason. US technology stocks continue to deliver stellar growth with 2024 earnings growth seen to accelerate to 20% versus 3.6% in 2023. With the AI boom in full force, these companies are expected to grow 21.8% and 17.5% in 2025 and 2026 as they attempt to roll out AI driven products and services.

As the market has made abundantly clear already, Trump is also good for the US market and technology is a major beneficiary as the tech bros all cozy up to the president especially Elon Musk. Trump is seen as pro-business and pro-growth with the proposed tax cuts and de-regulation which will naturally boost profits as well.

Lastly, you have the Fed pivot which is seen to continue with another 25 bps cut tonight and 50 bps more in 2025. This is clearly fueling the bull.

Why is the Fed doing this despite the very asymmetric risks of a policy error? This might have something to do with it. US fiscal deficits continue to blow out and 2025 is a major refinancing year for the US government.

Where are we today?

Fundamentals might be good for the first third or first 50 to 60% of a move, but the last third of a great bull market is typically a blow-off, where the mania runs wild and prices go parabolic. Paul Tudor Jones

Is the US market expensive? Clearly but for very valid fundamental reasons especially for technology stocks. That rotation call that I wrote in the last newsletter is clearly too early. Is it a bubble? While there are a few very stupid things going on, not just yet. In my view, we could get a big correction soon to digest the very overbought conditions but this bull market can still run for years.

What could set-off the correction? I see three things we have to watch for in 2025.

1. Fed policy to me is too loose and there could be another policy error in the cards that could cause an abrupt shift in rate cut expectations.

2. Trump executes on his more extreme policies and the bond markets balk.

3. The very high expectations for Mag7 and AI monetization are disappointed.

With the current set-up in Global markets. It’s safe to say that volatility is here to stay but you know what they say – volatility equals opportunity!