Is America overpriced?

SPEAKER_1 (0:01)

The systemic risk in the economy is affected both by levels of consumer debt and federal debt. They don't necessarily interact directly, but high levels of debt across the economy can create risks for stress in the financial system, perhaps ultimately instability in the financial system.

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Robert Armstrong (0:29)

Thank you.

Ethan Wu (0:36)

Pushkin, 2023 was a great year for US stocks. And in truth, the last decade's been pretty good for US stocks overall. The question on a lot of investors' minds is, can the US keep on winning?

This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in the New York studio, joined by red-blooded American patriot, Robert Armstrong.

Robert Armstrong (1:06)

I am draped in the flag here, buddy. Feeling good.

Ethan Wu (1:10)

Robert, where do you park your Eagle when you drive it into work every day?

Robert Armstrong (1:13)

I have an aviary. Is that what you call the thing you put a bird in? I have an enormous aviary for my giant mastodon American bald eagle that is on top of my apartment.

Ethan Wu (1:27)

We're going to be hearing from the ornithologist of the Unhedged audience about how we completely messed that up. But anyway, we're not talking about birds today. We're talking about US stocks, which are also flying high.

Robert Armstrong (1:37)

Indeed.

Ethan Wu (1:38)

And I think we want to consider this on three dimensions, right? One is the valuation of US stocks, right? How expensive are they? The other is what do the fundamentals look like, right? If you're paying up, what are you paying for?

And thirdly, what does the rest of the world look like? What do the alternatives to US stocks look like?

Robert Armstrong (1:57)

Very good. Let's start with pricing.

Ethan Wu (1:58)

Yeah, let's start with pricing. So I mean, expensive. There's a premium. You pay more for US stocks.

Robert Armstrong (2:03)

It's not just a premium, Ethan. It is a historically large premium. So the S&P 500, the index of large capitalization US stocks, which we focus on at Unhedged, it's at about 23 times earnings.

Most markets in the rest of the world, let's talk about Europe or let's talk about emerging markets. Japan are at like 15 times earnings. Some of them are at less. Let's unpack what that price earnings ratio means. That means to buy a current dollar of profit in the United States, you pay $23.

The rest of the world, you're paying $15. It's a huge difference, and that difference has just gone from very little to 50% over the last 10 years. The wedge is just getting bigger and bigger.

Ethan Wu (2:55)

Yeah. You pay roughly 50% premium to buy US stocks over the rest of the world.

Like you said, that's expensive. It's historically expensive. The question, of course, is what do you get for that price? If you can buy something that's twice as good for 50% more, that's a pretty good deal. So what are you getting for that $1.50 on US stocks?

Robert Armstrong (3:14)

Well, you are getting the most awesome country in the history of the world.

Let me explain.

Demographics, much better in America than in the rest of the developed world, meaning we are going to have a larger working age population relative to the total population for longer than the rest of the world. We won't face a demographic crisis to the degree that other developed countries will. We have a huge internal market, which means our companies can sell a lot of product to people within America. And that means, unlike countries like the UK, which are basically completely caught in the flow of global trade, there's an island of stability effect in the United States. And of course, we have a great corporate culture. We have strong rule of law. We have great companies. We have a huge lead in particular in technology. We spend way more in research and development. And there's a lot of doomerism around about America.

People on the right, people on the left, everybody likes to say boohoo, America this, America that. Well, we make more oil and gas in America than Saudi Arabia now. Yeah, it's really exceptional. No greenhouse gases or whatever, but just as an economic matter, we're the biggest oil and gas exporter in the world. We are the biggest exporter of food in the world. We're the biggest farming country in the world. In a lot of ways, America is just extraordinary. America is just extraordinary.