Have we reached peak U.S. exceptionalism?

Key Insights

U.S. stocks typically have featured higher valuations but also stronger earnings fundamentals than non‑U.S. stocks since the 2008–2009 global financial crisis.
While U.S. relative valuations remain high, future earnings may not support that premium. International value stocks could offer more attractive opportunities.

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The T. Rowe Price’s Asset Allocation Committee recently lowered its allocation to U.S. stocks in favor of international value stocks. The thinking behind this move is outlined below.

For the better part of the past two decades, U.S. stocks have outperformed non‑U.S. stocks, often by a considerable margin. This has led some analysts to view the U.S. market as exceptional—structurally superior to other world markets.

Relative valuation trends have also reflected that view (Figure 1). The valuation premium for U.S. stocks over non‑U.S. stocks rose steadily following the global financial crisis that ended in 2009. But that growing gap was supported by strong U.S. fundamentals, notably free cash flow growth and profit margins.

Peak U.S. exceptionalism?

(Fig. 1) Return on equity (ROE) and forward price/earnings (P/E) differentials, Russell 3000 Index vs. MSCI All Country World ex US

December 31, 2002, to February 25, 2025.
Sources: FTSE/Russell, MSCI (see Additional Disclosures) via FactSet.
¹ Forward P/E = Next 12-month consensus estimate
Actual future outcomes may differ materially from estimates.

Now that special advantage may be fading.

Take, for example, return on equity, or ROE, a key measure of company profitability. The ROE advantage for U.S. stocks over non‑U.S. stocks climbed from less than one percentage point in March 2009 to almost seven percentage points by June 2022. But, over the past two years, the ROE gap has moved roughly sideways. Meanwhile, the U.S. valuation advantage—as measured by the forward price‑to‑earnings ratio—has continued to climb.

That rising trend likely was due to market expectations that U.S. large‑cap technology companies would see big ROE improvements once their massive capital expenditures on artificial intelligence (AI) begin to pay off. That still might happen, but investors are growing more skeptical about the timing and magnitude of those future ROE gains.

Recent news flow has also been troublesome for the handful of mega‑cap stocks that dominate the U.S. tech sector. In late January, reports that a Chinese company had developed an extremely efficient, open‑source AI application called DeepSeek cast doubt on how much computing power ultimately will be needed to run AI applications. However, on February earnings calls, executives at several mega‑cap tech companies told analysts their capital spending budgets will rise even higher going forward.

A rosier backdrop for Europe

The growing skepticism about the U.S. earnings outlook stands in sharp contrast to an incrementally more positive environment for non‑U.S. stocks, particularly in Europe. The list of favorable developments there includes movement toward a resolution of the war in Ukraine and a positive turning point in economic momentum.

The potential combination of economic acceleration and a more supportive interest rate environment has been particularly encouraging for Europe’s banking sector, which has been out of favor with investors for much of the past two decades (Figure 2). It is notable that the price‑to‑book value ratio for the MSCI Europe Banks Index climbed above 1 times in February for the first time in more than seven years. Despite this steady rise, valuations remain well below the levels typically seen before the global financial crisis sent them crashing downward.

Steady improvement in European bank stock valuations

(Fig. 2) MSCI Europe Banks Index price‑to‑book (P/B) ratio

February 1, 2000, to February 21, 2025.
Source: Bloomberg Finance L.P.

Conclusion

The bottom line is that with U.S. stocks facing skepticism over the near term, there may be more attractive opportunities elsewhere—particularly in regions offering more attractive valuations combined with an improving macro outlook.

Timothy C. Murray, CFA® Capital Markets Strategist Multi‑Asset Division

Tim Murray is a capital market strategist in the Multi-Asset Division. Tim is a vice president of T. Rowe Price Associates, Inc.

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