As the S&P 500 and Dow roar to new highs, with the Nasdaq not far behind, attention is understandably centered on the resilience of corporate America and its extraordinary earnings power. But from a global perspective, the performance of Wall Street – and the U.S. – is far from exceptional.
So far this year, the S&P 500 and Dow are up 12 per cent, and the Nasdaq is up 14 per cent. That’s not too shabby, especially after last year’s bumper gains. Moreover, sky-high earnings growth is no longer isolated to the U.S. tech sector, with consumer discretionary companies and materials also posting eye-watering numbers.
Yet the big U.S. indices are barely outperforming many of their developed market peers, and, in certain instances, they are lagging.
Benchmark equity indices in the UK, Europe, and Canada have all recently hit fresh peaks, clocking year-to-date gains of 10 per cent, 12 per cent and 12 per cent, respectively. Asian markets have been highly volatile, recording sharp drops in July, but Japanese equities continue to outperform Wall Street, with the Nikkei up 28 per cent since January 1. And that’s despite the country’s recent currency and bond market ructions.
Perhaps the “American exceptionalism” mindset is just hard to shake, but when looking at economic growth and earnings - two of the most important foundations for a robust stock market - the U.S. simply isn’t outgunning its rivals to the extent that narrative might suggest.
U.S. earnings growth forecasts for the second quarter and calendar year 2026 are impressive. Year-on-year aggregate S&P 500 earnings growth forecasts for calendar year 2026 are running at a punchy 30 per cent, before slowing to a still respectable 15 per cent next year, according to LSEG’s Tajinder Dhillon.
But other regions are also enjoying earnings booms – and not just AI-frenzied emerging markets like South Korea and Taiwan.
In Europe, UBS equity strategists predict 25 per cent earnings growth this year and next, driven by a cyclical recovery and large-scale structural investment in areas such as AI, electrification, and defense.
The gap between the U.S. and European economies also isn’t as wide as many would guess. While the U.S. looks quite healthy – perhaps too healthy – on a nominal basis, headwinds are gathering force, namely high real yields, sticky inflation, and policy credibility issues. Real GDP growth over the last few years has been on a clear downward path, to a 1.5-per-cent annualized pace in the second quarter of this year from almost 3 per cent in 2023.
Meanwhile, the euro zone – often knocked as less dynamic than the all-powerful American juggernaut – grew 1.6 per cent in the second quarter, slightly outpacing the U.S.
Citi’s economic surprise indexes measure actual data prints relative to consensus forecasts, and the euro zone’s is currently the highest in 3-1/2 years, while the U.S.’ is the lowest in three months.
In developed Asia, the relative attractiveness versus Wall Street looks a little less clear-cut. Japan’s robust equity performance this year comes with caveats, not least that the Nikkei slumped 8 per cent last month. Japan has plenty of headwinds too, including a weak currency and policy credibility issues on both the fiscal and monetary fronts. Yet Citi’s Japan economic surprise index this week soared to its highest level in five years, although a stronger yen and elevated bond yields might soon cap that.
Finally, there’s the issue of relative rates. Equity investors like low real interest rates, and they’re getting that in the U.S., where the Federal Reserve’s inflation-adjusted policy rate is around zero. But real rates in the euro zone and Japan are even lower, both around minus 0.7 per cent.
To be fair, U.S. multinationals aren’t getting the boost from a weaker dollar that they got last year. But neither are they suffering from a strong dollar — the greenback is flat against a basket of major G10 currencies so far this year, despite all the noise around its recent 40-year high against the Japanese yen. Exchange rates don’t appear to be an issue for corporate earnings in 2026.
None of this is to say Wall Street won’t continue to break new highs for the rest of this year and beyond. Nor is anyone suggesting investors are about to withdraw from U.S. markets, home to the world’s most productive and profitable companies. Indeed, foreign demand for U.S. equities has never been higher, suggesting “FOMO” — the fear of missing out — is alive and well.
But in investing, it’s all about relative value. And other markets around the world seem just as attractive right now, maybe even more so.
That’s partly a matter of price. On a forward 12-month price/earnings basis, the U.S. is still significantly more expensive than Europe and the UK, although more comparable to Japan. Up until now, Wall Street’s multiples have been justified by earnings. But for how much longer?
Much depends on what happens with AI. Wall Street’s rally over the past year has been largely driven by AI investment, which will total almost US$600-billion in the U.S. alone this year, according to Goldman Sachs estimates. But it’s fair to assume that these expectations are already “in the price” of U.S. stocks, so the question is whether these gargantuan outlays can continue.
“We may be reaching a pinnacle of sorts in earnings and economic momentum, and investors are struggling with what comes next,” says Callie Cox, chief market strategist at Ritholtz Wealth. “We’re in market purgatory, and this may still be a good time to be strategic about where value lies.”