For more than 10 years, the US stock market has been the obvious place for investors.
Big technology companies, strong economic growth and rapidly rising company profits helped US shares deliver returns that far outpaced the rest of the world.
But that story is starting to change. New research from Anchor Investment Management has found that while the US remains home to world-class businesses, its stock market has become expensive, and future returns at an index level are likely to be far more modest.
Emerging markets are beginning to offer meaningful growth at more reasonable prices — something the US no longer does.
According to Anchor analyst Seleho Tsatsi the S&P 500 is trading on a forward price-to-earnings (P/E) ratio of about 22 times, meaning investors are paying R22 for every R1 of expected future profits.
This is very high by historical standards, said Tsatsi, who added that in the past 30 years valuations have only been this expensive during the dot-com bubble of the late 1990s and the Covid-19 boom in 2020-21.
Both periods were followed by sharp market declines. The S&P 500 fell nearly 50% after the dot-com bubble burst and dropped 25% in 2022 after the pandemic bull market cooled.
Tsatsi said that high valuations do not tell investors much about what will happen over the next year, suggesting that short-term returns can swing widely and markets can still rise or fall from these levels.
However, the picture changes when investors look further ahead.
“Historical data suggest that US returns over the ensuing 10 years are likely to be uninspiring at an index level. However, this does not necessarily imply that all US stocks will deliver such muted returns over the period.
“Instead, it suggests that index-level (such as the S&P 500) returns for US equities are likely to be modest over the next decade, even if select companies continue to generate robust returns,” he said.
‘Outperformance earned’
US shares earned their long-run outperformance, Tsatsi said. Since 2010, US company earnings have risen almost fivefold, helped by leadership in smartphones, cloud computing, software and artificial intelligence.
But he says that this earnings gap may now be narrowing. Consensus forecasts, he said, point to earnings growth of about 18% for emerging markets in 2026, compared with about 14% for the US.
At this point in the cycle, a more diversified global allocation appears prudent, as US index-level returns are likely to be modest over the next 10 years.
— Seleho Tsatsi, Anchor analyst
“That doesn’t mean the US story is over,” Tsatsi said. “But it does suggest that other regions are starting to catch up, while US investors are paying much higher prices for growth.”
The shift away from a US-only mindset is also being reinforced at home.
South Africa, which is also an emerging market, has seen a renewed “return to SA Inc” as investor confidence improved following the formation of the government of national unity. A stronger rand, falling bond yields and solid performance in local assets have drawn attention back to banks, retailers and listed property.
Foreign interest
Perspective Investment Management CIO Daniel Malan recently pointed out that several large South African companies are selling offshore assets and refocusing on local operations. Global firms have also been buying South African businesses outright, a sign that foreign investors see value in local assets.
Coronation portfolio manager Charles de Kock shared similar themes, warning about concentration risk in global indices dominated by US tech shares, while highlighting improving conditions at home, including lower inflation and better infrastructure performance.
According to Tsatsi, this is not a call to avoid the US, but investors should be cautious, as relying too heavily on US equities now carries higher risk.
“Instead, we argue that investors should not focus solely on the US. At this point in the cycle, a more diversified global allocation appears prudent, as US index-level returns are likely to be modest over the next 10 years.”
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