Market Factors: There are more than just ethical reasons to avoid U.S. stocks

Investors may be reconsidering their exposure to U.S. stocks given the country’s sinister profile under U.S. President Donald Trump, but is there a more powerful motivator than ethics alone? I’m reporter David Berman, filling in for Scott Barlow, and today we’re looking at why ethics could take a backseat to a far more powerful force: U.S. stocks are expensive. Also, we’ll examine why U.S. stocks have hit a weak stretch even as earnings rise by double-digits. And, Anne Murray emerges as the hero we need today.

Open this photo in gallery:

Equities

Ethics versus cold-blooded opportunity

Investors can avoid U.S. stocks as a protest against President Donald Trump’s belligerence toward trading partners, allies and immigrants. And Greenland. And health care. And foreign aid.

And education – okay, it’s a long list.

But there’s another reason for avoiding U.S. stocks that, while not an ethical consideration, gets to the heart of the problem: They’re expensive relative to the rest of the world.

Lofty valuations might not have been a big issue with many investors through last year, when the United States enjoyed unrivalled economic growth. Big tech stocks delivered spectacular gains, but the entire market was sizzling.

The era was known as U.S. exceptionalism.

Now, it’s looking more like expensive-ism. As the S&P 500 and the Nasdaq Composite Index decline into correction territory amid concerns about policy zigzagging and a downturn in U.S. economic activity, the valuation gap with the rest of the world is becoming harder to justify.

Savita Subramanian, equity and quant strategist at Bank of America, noted on Friday that U.S. large-capitalization stocks within the S&P 500 trade at about 20-times estimated earnings. Comparable large-cap European stocks trade at just 14-times earnings.

That means U.S. stocks trade at a 40 per cent premium, down from a peak of 69 per cent last year but well above the long-term average premium of about 20 per cent.

“The index remains statistically expensive on almost every measure we track,” Ms. Subramanian said in a note.

There’s another concern here: U.S. stocks dominate global benchmarks, making them vulnerable to a shift. For example, they account for a 65.8 per cent weighting within the MSCI All-Country World Index, where nine of the top 10 holdings are U.S.-based companies.

If global funds are now questioning their heavy tilt toward U.S. stocks, even a modest flow of money into smaller markets – including Europe, where stock prices are already outperforming the S&P 500 – could have a big impact.

Apart from Europe’s policy coherence and an improving economic outlook as fiscal stimulus kicks in, regions beyond the United States also benefit from better diversification given that indexes are less tech-heavy.

Janus Henderson Investors looked at the world’s top-performing stocks since 2022, when investors stampeded toward the Magnificent Seven U.S. tech stocks that captured the promise of artificial intelligence.

The firm found the leading seven stocks in the MSCI EAFE (Europe, Australasia and the Far East) – Novo Nordisk A/S, ASML Holding NV, SAP SE, Toyota Motor Corp., HSBC Holdings PLC, Siemens AG, and UBS Group AG – did almost as well as the Magnificent Seven over the same period but were not all tech names. They came from health care, industrials and financials as well.

“This lack of sector concentration provided investors with portfolio diversification and reflected growth drivers besides AI, including rising defence spending, rapid medical innovation and the end of zero-rate monetary policies,” analysts at Janus Henderson said in a note.

There are sound reasons for avoiding U.S. stocks. But the pull toward non-U.S. stocks is a powerful force, too.

Markets

Earnings versus valuations

The profit picture for the S&P 500 looks pretty good. What doesn’t: The price investors are willing to pay for those profits.

The fourth quarter reporting season for companies within the U.S. blue-chip index is just about complete, and data from LSEG I/B/E/S show that profits are on track to rise 17.1 per cent from the same period last year. Exclude the energy sector, and profit growth is even better, at 20.7 per cent.

However, valuations are falling – fast – as investors deem U.S. stocks as more risky than they once were, given the policy uncertainty from Washington and signs of rising economic stress from tariffs.

The price-to-earnings ratio for the S&P 500, based on estimated 2025 earnings, has fallen to 20.7, according to data from Bloomberg. That’s down from 24.8 at the end of 2024, when investors presumed the newly elected Mr. Trump would soften his stance on tariffs when he assumed the presidency in January.

To be clear: The lower valuation follows rising earnings and declining stock prices. The current valuation is still no bargain, though, especially as Mr. Trump suggests that nothing will dissuade him from a global trade war that few observers embrace as good policy.

Open this photo in gallery:

Diversions

Anne Murray versus Donald Trump

Canadians are finding encouraging messages about the future of the country from a lot of different sources. The latest: Anne Murray.

According to The Globe’s coverage of the Juno Awards, Ms. Murray not only appeared at the ceremony in a sequinned Team Canada jersey but also talked the walk.

“If you’ll permit me, one more thing, because the majority of my work was in the U.S., I was pressured very early in my career to move to New York or Los Angeles – and I just couldn’t do it,” Ms. Murray said during her acceptance speech after receiving a lifetime achievement award on Sunday.

“I just knew instinctively that I needed a place to go to escape when my work was done – Canada was my safe haven, my safety blanket, my light at the end of the tunnel, and it still is.”

Over to you, Wayne Gretzky.

The essentials

Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.

Globe Investor highlights

Looking to reinvest some money abroad? I take a look at the high-flying European financials sector. And if that whets your appetite, check out Ian Tam’s screen of TSX-listed European stock ETFs that have outperformed their peers

Economist David Rosenberg says Ottawa should make these bold moves to save the country in the trade war. Among the suggestions: bring back Canada Savings Bonds.

Gordon Pape says these three ETFs should do well in a falling market

Rob Carrick reports on a striking decline in the number of investors complaining about the suitability of their holdings

Pierre Poilievre’s switch to an all-Canadian portfolio is good politics, but an iffy investing strategy, says Tim Shufelt

Tom Bradley has some thoughts on making prudent but boring investment advice a little more engaging for the young

What’s up next

Liberation Day is coming on April 2, when the White House is set to announce reciprocal and industry-specific tariffs – and trading partners, presumably, following with their own announcement.

The flurry of news and reactions, threats and bluster, will no doubt drown out some of the week’s economic readings and earnings reports. But these snapshots offer valuable insights into the environment that tariffs are now set to disrupt.

On Tuesday, the ISM purchasing managers’ index of U.S. manufacturing activity will decline below 50, according to a consensus of economists – slipping below the threshold that separates expansion from contraction. Economists expect a reading of 49.8, down from 50.3 in February.

On Wednesday, look for the ADP Employment report, which will offer an initial assessment of the U.S. labour scene ahead of the non-farm payrolls report on Friday.

As for earnings, the last holdouts for companies within the S&P 500 – Conagra Brands Inc. and Lamb Weston Holdings Inc. – will report their fourth-quarter results.

See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)