This is an audio transcript of the Unhedged podcast episode: ‘Are US stocks too expensive?’
Robert Armstrong
Special note to listeners: we’re very keen to hear your questions and answer them on the air. If you have burning questions about markets, finance or the economy, send them to [email protected].
Katie Martin
USA. Heaven knows we’ve talked about it a few times on this show. But here’s the thing. Some smart people are starting to worry that this whole US exceptionalism malarkey has gone too far. Today on the show, we’re gonna figure this out once and for all. And we’ve got two questions. First, is this a bubble in the US? And second, can I get through this podcast without a huge coughing fit? (Robert laughs) There’s only one way to find out. Stop it, Rob. Time is short. I could die at any moment.
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Robert Armstrong
I know. Both of us. If we both die while recording this podcast, it’s gonna become a kind of classic. That’d be a glorious way to go out — on air.
Katie Martin
Anyway, hush. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist at the FT, in a rather dark and wintry London. Thank you so much to my very lovely colleagues Joshua Oliver and Chris Giles for stepping in last week while I was in my sickbed. Joining me down the line from New York City is Mr Robert Armstrong, master of the Unhedged newsletter, who is slowly emerging from his Thanksgiving food coma.
Robert Armstrong
It’s true. I had a food coma and then I got a cold, so I’ve been in two different medical conditions.
Katie Martin
Is Thanksgiving basically just like a huge national germ-sharing exercise?
Robert Armstrong
Yeah. That’s basically what it turns out to be. But you have it, too. We both have it. Somehow it got across the Atlantic too, so we all got it.
Katie Martin
It’s really going around, everyone, even though it’s very, very boring.
Robert Armstrong
But the disease we’re really interested in is bubble disease in the US market.
Katie Martin
Bubble disease, the worst disease. So, look, you do some talking while I rest my voice.
Robert Armstrong
OK.
Katie Martin
Why can’t we just have nice things, right? So US markets are doing really, really well. So who is crying bubble and why can’t we just ignore them?
Robert Armstrong
Ruchir Sharma, who is an FT contributing editor, I think is the title. He writes a periodic column in the paper.
Katie Martin
A very good one.
Robert Armstrong
Very good column. Basically came out and stomped his foot and said the US is in a bubble, a sentiment with which I happen to agree. So his point is a relative point. His point is that US stocks are more expensive relative to global stocks than they’ve ever been since we’ve been keeping track of these sorts of things. The killer stat he uses is 70 per cent of global stock indexes of like the main global stock indexes is US stocks. In the 1980s, it was 30 per cent. And yes, we all know the US has some special strengths, but this has really gone too far.
And I would add to his point that in absolute terms, US stocks are about as expensive as they ever get, and you can use whatever model you want. There are some people who would argue with that but by most measures, they’re extraordinarily expensive and getting more so.
Katie Martin
I am one of the people who would argue with that, right? So there are two analogies that people bring up when they want to say this is all getting ridiculous, abandon hope all ye who enter here. One of them is this smells quite a lot like Japan. Like at a certain point, Japan occupied a massive proportion of the global stock universe and that all ended in tears.
The other is this all smells like the dotcom boom. You’ve got like a smallish number of big tech names that are just kind of flying up to the moon. It’s just not clear to me that either of these things really applies, not least because these stocks, you know, you look at the kind of Nvidias and Microsofts of the world, they’re doing incredibly well but their earnings are doing incredibly.
Robert Armstrong
Earn a lot of money.
Katie Martin
You know, what’s to worry about here?
Robert Armstrong
The extremes aren’t as extreme as the Japan and dotcom case. The thing about those two cases is that you had individual asset classes in the case of real estate in Japan and individual stocks, as in the case of like Cisco in the US, which were not at 40 times earnings. They were like 120 times earnings. You know, they were massively expensive. The famous thing like the Imperial Palace in Tokyo, the land it’s on, costs more than all the land in California or something. It was bonkers. And now it is different in this respect because now it’s like everything is quite expensive rather than a few things being mind-bogglingly expensive. So that is actually different.
And look, another point we should bring up is that the US does deserve a premium. Yesterday I looked at the S&P 500 earnings expectations and compared it to the Europe S&P 350, which is like an equivalent big cap. And, you know, the growth expectations over the next couple of years for the S&P are kind of like 12 per cent earnings growth, which is pretty high expectations. And on the European equivalent, it’s like 9 per cent. So it’s a little bit over a 2 per cent difference, 2-3 per cent difference. Actually, a 2-3 per cent difference in growth makes a big difference if it’s sustained over time. In other words, you should pay a lot more for, all else being equal, for an asset that’s growing two percentage points faster than its competing asset, as it were.
Katie Martin
So, Rob, I’m sure you are a religious reader of every word that I write on the pages of the FT.
Robert Armstrong
Yes.
Katie Martin
So you will no doubt be aware that just the other day I was speaking to the BlackRock Investment Institute, a kind of research brains trust (inaudible).
Robert Armstrong
Yes. Very serious people over there.
Katie Martin
Very serious people, including Jean Boivin, who used to be at the Bank of Canada, like the central bank . . .
Robert Armstrong
You pronounce that beautifully, Katie.
Katie Martin
Thanks so much. It’s my cold; makes me sound really husky and sophisticated. (Laughter) But he was making the point that, you know, normally you look back to the past and you see this kind of gaping hole between where the US is and where the rest of the world is. And in the past, you would say, OK, this is gonna mean revert. And in the past you would also say, OK, you’ve got whatever it is, 30 per cent of the S&P 500 is taken up with a tiny number of stocks. This is going to mean revert. It’s all gonna spread out.
But mean reversion only kind of works if you’re operating under a certain set of circumstances. What if what we’ve actually got here is a paradigm shift, right? This isn’t just a secular thing. This isn’t just a kind of, you know, what point of the economic cycle are we in? This is there has been a breakthrough in technology, which is AI technology, which the US is completely dominating. And this is not a thing that necessarily will kind of fall back into a place that we’ve been used to for the past 20 or 30 years.
So actually, you know, it’s not just him who’s saying this. There are lots of investors that I speak to who are saying not being in the US and not being in US Big Tech is a really big call for an investor to make. It basically means you’re saying, I just reject the premise of this entire technological revolution and I’m not in it. And that’s actually quite dicey. You know, the safest thing to do for a lot of investors is actually roll with it, just keep ploughing into US.
Robert Armstrong
Man. It’s tough. I got a couple of things to say. One thing is this difference between the United States and the rest of the world in terms of how much stocks cost. That started before the AI hype, right? So something’s been happening before ChatGPT. So that’s one point. And we can talk about what that is, whatever. The second thing is I’m a terrible hypocrite. So I have kind of normal stock portfolio, which is all made up of ETFs and . . .
Katie Martin
In your family office, right? Billions (inaudible).
Robert Armstrong
In my New York (inaudible) family office staffed by one person, me, very occasionally checking in. And this is actually to the point, which is that a certain point some years ago I had a properly diversified global portfolio, right, and because I am a lazy, shiftless journalist, I don’t rebalance it like you’re supposed to.
Katie Martin
With less money.
Robert Armstrong
Yeah. I have not that much money, so it doesn’t matter that much, and I just let it run. And as it turns out, this has been a great decision. If I had rebalanced, I would have been constantly taking money out of the US ETFs and putting it into the global ETFs, which would have been a deadweight loss. So the result of doing nothing, as a result of doing nothing, it’s all done great and it’s now massively overweight the US. So you might well ask me: Armstrong, if you think this is a bubble, why don’t you sell those US stocks?
Katie Martin
Armstrong, if you think this is a bubble, why don’t you sell those US stocks?
Robert Armstrong
Because I’m too scared. I feel like this bubble is gonna grow much bigger. (Laughter)
Katie Martin
Yeah. Yeah. Like, why would you buy stuff that’s cheaper just because it’s cheap? Some of these things are cheap for a reason.
Robert Armstrong
Yeah. And like, we have this new president coming in and that team of his, everything they say. They disagree on a lot of stuff but what they agree on is we are going to prioritise domestic economic growth over everything. We’re going to massively deregulate. We’re going to make sure oil becomes cheaper. We are going to cut corporate taxes. It’s gonna be growth, growth, growth. Meanwhile, the rest of the world is like gonna get tariffs. And it’s like Europe is trying to regulate everything to death and there’s general disorder and dismay. You know, yes, you can say that in from the point of view of history, I think it is true. US assets are probably overvalued. But I can’t take the pain of being in cash until the valuations converge with the rest of the world. I’m too scared. I’m too big a wimp to make that call with my own money.
Katie Martin
Yeah. And you know who it is here that’s important is Tina.
Robert Armstrong
Tina. We love Tina.
Katie Martin
Oh, lovely Tina. So the thing with Tina is that this was this like, stupid markets acronym thing that people used to throw around when they were saying there is no alternative, right? T-I-N-A, Tina. Back in the day, there was no alternative to stocks because like, bonds were rubbish. They yielded like nothing. So people got pushed further and further into riskier asset classes because Tina, because Tina, because Tina.
And now Tina is kind of being wheeled out again. And with reference to the fact that there is no alternative to the US. Like, why would you waste your time investing anywhere else? There are great opportunities in lots of other places. It’s just that that is the mantra at the moment.
Robert Armstrong
And if you read — we talked about this the other day — you read what Wall Street is saying, Tina is like a kind of euphoria, right? This is why I like Sharma’s point, is we’re clearly in an environment where people are . . . Everybody is buying the America story in its entirety. Everybody is super psyched about it. Everybody is overweight the US. Everybody is scared to own anything else.
So here’s a question. So my prediction, for what little my predictions are worth, is this bubble gets bigger before there’s a correction. And it’s interesting to think about what might be the thing that causes . . . I mean, it’s famously impossible to do this, but it’s fun to do all the same. What might be the thing that causes a reshuffling of the deck so that US assets aren’t so overvalued compared to everything else?
Katie Martin
Yeah, it’s hard to think of anything off the top of my head.
Robert Armstrong
Here’s a general candidate. Let’s suppose that the Trump administration, Trump II, has its foot hardcore on the gas, right, on every respect that we just discussed. And although they talk a lot about how they’re gonna get the deficit under control, that turns out to be kind of hard to do as it I’m sure it will. And maybe they don’t have the political will to do what needs to be done. So the deficit actually grows, the economy is running hot and we have a significant re-emergence of inflation. Inflation is hard to predict. If we learned anything from the last five years, it’s that predictions about inflation should be taken with a massive container of salt.
However, if that should happen, OK, now the US has to tighten policy again or deal with inflation again, right? And either way, that changes the relationship between the US and the rest of the world in a fundamental way that maybe the Trump administration has to take their foot off the gas, right? And they’ll be faced with these hard choices and blah blah blah. And you can see the deck getting reshuffled. Combine that with a tariff war, you can see how on one possible future you have a US that massively outgrows the rest of the world for the foreseeable future. You have another possible world where the car gets out of control and swerves off the road, basically.
Katie Martin
Yeah. But yeah, I was talking to an asset manager person the other day about this and he was saying, you know, there is no US exceptionalism without US institutional resilience, right, without the fiscal situation remaining kind of broadly contained, without lots of interference from the Fed. You know, all that sort of thing. So, you know, stocks are, they’re not completely like bulletproof, but the bar is really high in terms of, you know, things would have to get really bad for investors to say, OK, I’m out.
Katie Martin
And ultimately, if it was tariffs or whatever it was that was exerting lots of pressure on the US economy, the rest of the world would likely be feeling the pain from that too. So you still end up it’s almost like whatever the question is, the answer is US, which feels like an uncomfortable place to be. But I just think we’re gonna be there for quite a while.
Robert Armstrong
I agree. But I mean, what does a bubble mean? A bubble means that at some point in the future — we don’t really know, but not the ridiculously distant future; let’s call it five years — you look back at where US stocks are now and you look at your own portfolio and you think to yourself, man, I should have had more cash, right, because shit blew up and now I have a chance. If I had more cash, I’d have the chance to buy these assets now at a much cheaper price than I could have way back in December of 2024, right? So in the next five years, are you gonna look at your portfolio circa right now and think, I shoulda had more cash and less US stocks. I’m guessing it’s a hard . . . Like I said, if I believe this, I’d go today and I’d sell some US stocks. So I guess I’m still on the fence, truth be told.
Katie Martin
So you think it is a bubble and it’s gonna keep on inflating (inaudible) and you probably don’t feel that now.
Robert Armstrong
On inflating, yeah, and you’re gonna feel like hell if you get out now, right?
Katie Martin
Yeah. You’re gonna feel like, oh I’ve been so clever. But look how much money I’m losing.
Robert Armstrong
But I tell you, I’m watching. And if we get another 20 per cent up on this thing, maybe I will think about massively cutting down on exposure to United States. And I think we could get another 20 per cent.
Katie Martin
For what it’s worth, I don’t think this is a bubble. I think it’s pretty rational. I think it just keeps on like grinding higher through the rest of next year yeah. And this dispersion, this kind of divergence of the US from the rest of the world just keeps . . .
Robert Armstrong
So let’s set a date on which either you can say that I am stupid or I can say that you are stupid.
Katie Martin
I mean, I say that about you every day.
Robert Armstrong
I know, but we’re talking about saying it on air. So I say two years from today.
Katie Martin
Two years?
Robert Armstrong
Right? I think that’s what we’re talking about. Things . . . Within two years, we’re going to have a difficult disruption that makes us look back and say, I shoulda held more cash and less US assets.
Katie Martin
Let’s just delete that podcast that’s made us look really stupid. Yeah. All right. Fair enough.
Robert Armstrong
Yeah. OK. And so Christmas season 2026, either you will be calling me stupid or I will be calling you stupid out in front of God and everyone on this podcast. (Laughter)
Katie Martin
Fine. Listeners, what do you think?
Robert Armstrong
Who is the stupid one, listeners?
Katie Martin
Who’s the stupid one, Rob or Katie? We actually, we really enjoy getting your feedback and getting your questions, and we try and loop as many of those questions into the pod as we can. So hit us up if you think one or the other or both of us are stupid. There’s an email address that will reach the both of us. That’s [email protected].
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Drop us a line. Be nice. I’m gonna grab a cough sweets and then we’re gonna be back in a second.
Robert Armstrong
Congratulations on not dying during the podcast, Katie.
Katie Martin
Thank you so much. There’s still time.
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Alrighty. It’s time for Long/Short, that part of the show where we go long a thing we love or short a thing we hate. Rob, I’m gonna go first ‘cause I think I might be about to lose my voice. And very obviously, I’m going to go short this lurgy. Whatever this bug is I’ve had enough of it. Everyone is ill.
Robert Armstrong
Yes. It’s a powerful one. And both sides of the Atlantic, everyone’s ill. This lurgy can swim, apparently.
Katie Martin
Yes. (Laughter) What have you got?
Robert Armstrong
I am long Elon Musk’s absurd $56bn pay package. The court in Delaware said no, you can’t have it. It was illegitimately granted. I have a lot of respect for the Delaware Chancery Court and I wouldn’t wanna cross them. But I think once a board acts stupid and writes a very stupid pay agreement that ends up giving the CEO $56bn, they have to give the CEO $56bn. This is a legal . . .
Katie Martin
Heaven knows if someone wrote down somewhere that they’re going to give me $56bn, I would pursue that.
Robert Armstrong
Yes, man. This is an ancient principle of the common law called no givesies, no backsies. And I really do think it’s a matter of incentives. Nobody can protect a lazy and shiftless bo