The volatile swings in stock prices since the Iran war began have masked a broader trend that started last fall: the rapid contraction of the valuation premium enjoyed by U.S. stocks.
For more than a decade, U.S. stocks traded at a significant premium to Canadian and other global equities when measured on a price-to-earnings basis, a reflection of the astonishing run-up in stock prices for U.S. tech giants and an economy that consistently outperformed its peers on the back of the resilient U.S. consumer.
However, since October the valuation premium for the S&P 500 has steadily narrowed with that of the S&P/ TSX Composite Index and the S&P benchmark that tracks world equities excluding the U.S.
Measured against Canadian and global stocks, that premium for U.S. equities is at its lowest level since 2020 and in line with where it was prior to the pandemic.
The peak of what’s sometimes referred to as the American exceptionalism trade occurred shortly after Donald Trump clinched the U.S. presidency in late 2024. The premium for U.S. stocks took a beating in the wake of Mr. Trump’s “Liberation Day” tariff announcement in April, 2025, but rebounded as investor enthusiasm for all-things artificial intelligence powered a renewed rally in the Magnificent Seven tech stocks.
Even so, the performance of U.S. stocks lagged Canadian and global equities last year, and have continued to underperform this year.
The U.S. valuation premium may once again rebound, but with investors reassessing their bets on frothy tech stocks since last fall – not to mention the continued uncertainty around U.S. tariffs and other policies – the American exceptionalism trade looks increasingly under pressure.
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