Is the Exceptional Performance of US Stocks Sustainable? Key Takeaways for Investors

The persistent outperformance of US equities over international developed markets since 2008 has left investors grappling with allocation decisions. AQR’s 2025 analysis, “Exceptional Expectations: U.S. vs. Non-U.S. Equities,” dissects this trend, offering data-driven insights into its drivers and implications.

AQR’s Antti Ilmanen and Thomas Maloney analyzed the drivers behind US equity outperformance by conducting a detailed decomposition of returns between US and non-US developed markets over the past 35 years. Their approach included the following key steps:

Return Decomposition

They broke down US total outperformance into its fundamental components: relative valuation changes (primarily using the cyclically adjusted price/earnings ratio), real earnings per share growth, dividend yield differentials, and real interest rate differentials. For the 35-year history ended December 2024, they found that US equities outperformed non-US developed markets by 4.7% per year, with 3.8% attributed to relative valuation expansion, 1.1% to real EPS growth, negative 0.6% to dividend yield differential, and negative 0.3% to real interest rate differential.

Since it is debatable how long history is most relevant, the authors also showed a similar decomposition for any available history length.

Validation Analysis

The study highlighted that the majority of US outperformance was due to valuation “richening”—valuation expansion alone contributed nearly 4% annually to the US return edge. Since 1980, roughly two-thirds of US equity outperformance stemmed from US valuation expansion, not earnings growth. From the end of 2008 through the end of 2024, the CAPE 10 ratio for US equities rose from 15.9 to 37, an increase of about 130%. In comparison, the CAPE 10 of the MSCI EAFE rose from 13.6 to 18.5, an increase of 36%, and the CAPE of the MSCI Emerging Markets rose from 14.5 to 15.6, an increase of only about 7%.

Fundamental Growth Assessment

While US equities did enjoy a real earnings growth edge, it was much smaller than the impact of valuation changes. The authors used 10-year smoothed real EPS growth to ensure comparability with CAPE-based valuations, finding that earnings growth played a secondary role in explaining outperformance.

Sector Composition Considerations

The US market’s heavy weighting toward technology stocks (the Magnificent Seven) explained about half of its outperformance and valuation premium. By 2024, these seven stocks alone surpassed the combined market cap of all European equities.

Predictive Value of Valuations

An examination of how relative CAPE ratios have historically predicted subsequent 10-year relative performance between US and non-US equities. There was a strong correlation. For example, when the non-US CAPE was double the US level in the late 1980s, non-US equities underperformed for over a decade. And periods of high US relative valuation (such as in March 2000) have tended to precede weaker US relative returns.

Comparison With Capital Market Assumptions

They compared their findings with institutional capital market assumptions, noting that most CMAs have, since 2011, projected lower future returns for US equities because of their higher valuations and lower starting yields.

Ilmanen and Maloney also found that US growth expectations are stretched. They found that to justify current valuations, US equities would need 2.2% higher annual real earnings growth than non-US peers over the next decade—well above the historical 0.3% edge. This assumes the exceptionally wide gap in valuations persists. Importantly, any assumption of convergence toward more equal regional valuations would lead to a larger estimate of the required US growth edge.

Key Takeaways for Investors

• Valuations matter—the US CAPE ratio is near historic highs relative to non-US markets, suggesting lower future returns unless earnings growth surprises on the upside.
• Mean reversion in valuations could lead to prolonged US underperformance, as seen in Japan post-1989.
• Investors should question growth assumptions, given that markets are pricing in a 2.2% annual US growth edge. Investors should stress-test these assumptions.
• Diversification is still the prudent strategy—overconcentration in US equities—especially tech—exposes portfolios to sector-specific risks and valuation reversals.
• Currency dynamics matter. From the end of 2008 through 2024, the US dollar rose in value relative to the euro from 0.72 to 0.92, an increase of almost 29%. The strong dollar suppressed international returns for US investors. However, if the dollar weakens, this headwind turns into a tailwind for global equities. Concerns about trade negotiations and the burgeoning US fiscal deficit led to the dollar falling to 0.89, contributing to the outperformance of foreign equities in 2025.

Is US Exceptionalism Sustainable?

In summary, Ilmanen and Maloney’s analysis revealed that US equity outperformance has been driven much more by valuation expansion than by superior earnings growth or other fundamentals, raising questions about the sustainability of such outperformance going forward. While US exceptionalism has rewarded investors for decades, AQR’s analysis underscores that extreme valuations and stretched growth expectations create asymmetrical risks. Investors should weigh these factors against their conviction in perpetual US dominance.

Economic theory and experience both argue for global diversification, even though it can be psychologically difficult when one region dominates for so long. With US equity valuations stretched and the pillars of past outperformance—low rates, globalization, dollar strength, Fed independence—now on shakier ground, the current environment may favor a broader, more balanced approach.

My 30 years of experience as an advisor has taught me that recency bias leads many investors to forget that US equities underperformed non-US stocks in the early 2000s, as well as in the 1980s and the 1970s. The US outperformance since 2008 has been exceptionally consistent and reflects both rising relative valuation and an abnormally large growth edge. A rearview-mirror perspective leads many extrapolative investors to predict more of the same. However, long-run analysis suggests that mean-reversion is more likely than continuation after both a decadal richening and abnormal decadal growth edge.

For those holding market-cap-weighted global portfolios, the research reinforces the case for strategic rebalancing to avoid overexposure to a single region, noting that the US CAPE ratio is near historic highs relative to non-US markets, suggesting lower future returns unless earnings growth surprises. Importantly, any mean reversion in valuations could lead to prolonged US underperformance, as seen in Japan post-1989.