U.S. Stocks Are Expensive, and Still Set to Outperform the World

Investors are paying the steepest premium to hold U.S. stocks in more than 25 years. Photo: Getty Images

U.S. stocks command a much higher valuation than their global peers, based in part on growth forecasts, the tech sector’s dominance, and the market’s vast liquidity, a trend that is likely to continue.

The valuation premium investors are paying for U.S. stocks is largely justified, according to a report from Capital Economics. The biggest investors continue to load up on the market’s more expensive stocks and shun their cheaper alternatives.

That likely means the S&P 500 can extend its impressive spring and summer rally into the final months of the year. Stocks can power ahead even if traditional valuation measures suggest that prices are higher than makes sense based solely on forecasts for corporate profit growth.

“We think a backdrop of improving risk appetite, a fairly resilient U.S. economy, and continued progress being made in AI tech itself will offer a tailwind for tech sectors over the rest of 2025,” said James Reilly, senior markets economist at Capital Economics. “In that world, it’s hard to see what would knock U.S. tech sector earnings off their perch.”

Tech earnings growth, and the sheer weight of the biggest stocks in the sector on broader U.S. indexes, are a key factor in the higher valuations tagged to domestic markets, Reilly argues.

Based on the MSCI USA index, which tracks around 544 stocks, Reilly suggests investors are paying the biggest premium to own U.S. stocks relative to the indexes of 20 other countries in at least 25 years.

The MSCI USA index is trading at a multiple of around 23 times the earnings its constituents are expected to generate over the next 12 months. That is largely in line with the price/earnings multiple of the S&P 500 , which closed at a record high of 6501 points on Thursday.

That extends its post-Liberation Day rally to around 30%, while the forecast for collective S&P 500 earnings has only risen by around 5% over the same period. LSEG estimates last pegged it at $283.34.

Reilly says that the overall size and liquidity of the U.S. market, compared with overseas alternatives, attracts larger amounts of passive investment dollars, such as from index funds. That provides a steady flow of support that explains some of the difference.

“And the number of companies included in the index means that, all else equal, investing in the MSCI USA Index offers greater diversification than investing in an index elsewhere,” he wrote.

The higher U.S. premium likely reflects confidence that earnings will keep rising past the 12-month benchmark typically used to value equities in markets around the world, Reilly said. “In other words, while it may appear that investors are paying a premium for U.S. assets, they may just be paying for superior long-run growth,” he said.

Recent data from Bank of America could support this view. The bank’s Quant Strategy team notes that compared with the S&P 500, longer-term investors are overweight all but two of the so-called Magnificent Seven tech stocks: Apple and Tesla .

The same investors are underweight the average non-Mag Seven stock by around 20%, even though they are notably “cheaper” in terms of the price-to-earnings multiple, than their larger-cap peers.

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, thinks the preference is based on bets that tech and growth stocks are less affected by tariffs and will perform better in a sluggish economy.

“The gap between Mag seven and the rest of the S&P 500 on EPS growth has shrunk relative to 2023, but Mag seven has maintained a gap—refusing to cede its earnings dominance on the forward-looking consensus stats,” she said in a note published Friday. “After hitting a low point in 2026, the gap is anticipated to widen in Mag 7’s favor again slightly in 2027.”

Calvasina also notes that since the post-Liberation Day lows of early April, the MSCI USA index has outperformed peers in Europe, Asia, and Australia.

That trend, according to Reilly at Capital Economics, is likely to continue, even if investors continue to pay up to ride the rally. “We expect the valuation of the MSCI USA to remain higher than most of its peers over the coming year, helping support a renewed outperformance of U.S. equities through that period,” he said.

Write to Martin Baccardax at martin.baccardax@barrons.com