The US market is shut today for Martin Luther King Day, a national holiday introduced as a symbol to represent equality before the law and peaceful protest.
In other recent news from the US, they have unilaterally invaded Venezuela, arrested its President and are seizing Russian flagged oil ships in the Atlantic. Trump has taken to wondering out loud about invading several other countries including Greenland, which as part of Denmark is a fellow member of NATO. He has opened a criminal investigation into the chairman of the US central bank over a $2.5bn building renovation, leading to an extraordinary joint statement of support from 11 other central banks including the Bank of England offering “solidarity”. The US government appears to be aggressively rounding up and deporting immigrants and are threatening to send in the army to deal with protests against this. Trump’s tariffs are being reviewed by the Supreme Court which may find them unlawful and need to be repaid.
Over the weekend the Greenland threats have escalated towards other European countries, including the UK, who are being promised increased tariffs if they fail to support the idea of the US taking control of Greenland.
It is the middle of January and Christmas already seems like a long time ago.
Despite all this, global equity and credit markets have got off to a positive start and continue to go higher following a good year in 2025.
US equity valuations in particular sit at the very top of their long-term range. At the beginning of 2019 the US was the most expensive major market trading at 14.3x earnings while Emerging Markets were the cheapest at 9.8x – a differential of 4.5x or a 46% premium. Roll forward to the end of 2025 and the US is still the most expensive on 22.4x but the UK has now fallen into last place on 13.1x which is now a 71% premium from top to bottom.
The market appears to see the US as increasingly attractive in comparison to other equity regions and has become willing to pay more and more for it, but I think we do need to keep asking ourselves if we think it is true that the US is more attractive than it has ever been on a relative basis versus other global equities.
I don’t know the outcome of some of these very large issues coming out of the US, but I think it is becoming increasingly difficult to shrug them off. How is it even possible to spend $2.5bn renovating a building – what are they doing to it? But the point is – to my mind at least – your risk in the US is increasing but it is hard to find signs of the market reflecting this. European and UK markets are down slightly this morning perhaps partly following the escalation of events over the weekend and we will have to see what happens when the US re-opens tomorrow.
But it’s not just the equity market. Year to date US equities are up about 1.5% and the dollar is up about 1%. Corporate debt continues to creep higher, tightening credit spreads even further in the early part of the year. Government bond yields have hardly moved.
It’s true that this means the US is underperforming several other regions – including (again) the UK, Japan and China – but these regions are nowhere near their historical peak valuations as a starting point.
What I think “the market” would tell you if it could, is that volatility is low, corporates are healthy, they are not too indebted, rates are coming down, pretty good earnings growth is pencilled in, and Trump is robustly defending US domestic interests. Small and mid-cap US stocks are up a lot more than large caps over this short period, perhaps reflecting this.
We have been underweight the US within both global equities and credit for some time on valuation grounds. It has not always helped us but started to last year and it has continued into the early part of this year as well. We understand the market likes a narrative and a helpful explanation. AI, a step change in productivity, a new paradigm, you don’t get it. But there are plenty of alternatives to the US, with fewer problems and better starting points.
Robert Fullerton – Senior Research Analyst
FPC26623
All charts and data sourced from FactSet
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