Do Not Underestimate America’s Earnings Machine
Do you remember when, just a few months ago, many experts insisted that U.S. stocks were too expensive, while Europe, and even China, offered the real value?
I never bought into that thesis.
At the time, I wrote several posts (here, here, here and here) warning that so-called “cheap” markets can easily become value traps. Low valuations alone are not enough. A market may look inexpensive for a reason, especially when earnings growth, innovation, capital allocation, and structural competitiveness are lacking.
That is why I was never persuaded by the simplistic argument that “Europe is cheap and the U.S. is expensive.” Cheapness is not a strategy. Earnings are.
Now Bloomberg (reproduced here without a paywall) seems to be reaching a similar conclusion. As Bloomberg reported:
“I don’t think I remember a time that sell side consensus missed actual earnings number by so much,” said Charles Henry Monchau, chief investment officer at Banque Syz & Co SA. He began the year positioned for international markets to outperform, but the war and AI boom prompted him to tactically shift back toward US stocks, noting that regions such as China and Europe “might not be the winners of this war (emphasis supplied).”
The lesson is clear.
Do not blindly trust consensus. Do not blindly trust the experts. And above all, do not underestimate the United States.
In the end, earnings matter. And unless something changes drastically, the U.S. remains the undisputed leader in earnings generation. Energy independence, relentless innovation, a flexible labor market, relatively lower taxation and lighter regulation, and, whether some like it or not, unmatched military strength all reinforce America’s ability to create, scale, and protect profit generating businesses. Valuation arguments may sound persuasive in theory, but markets ultimately reward companies and economies that deliver profits, innovation, and growth.
The chart below shows the whole story:
Sincerely,
Manuel Blay
Editor of thedowtheory.com
