U.S. Stocks - The Biggest Bubble?

Is the world economy becoming increasingly unipolar?

On December 2, Ruchir Sharma, chairman of Rockefeller International, a wealth management and financial consulting firm, stated that the U.S. stock market is overvalued.

Sharma noted that in terms of politics and diplomacy, people have begun to perceive that the U.S. is somewhat dysfunctional; however, in the investment community, the concept of "American exceptionalism" is more popular than ever, and global investors seem convinced that the U.S. has the ability to continually surpass other economies, pouring more capital into this single country, which is causing the U.S. stock market to continually set historical highs.

Currently, the U.S. stock market is far ahead of other global markets, accounting for nearly 70% of the leading global stock indices, significantly higher than the 30% in the 1980s. According to certain indicators, the current exchange rate of the dollar is also higher than at any time in the past 50 years.

During the peak of the internet bubble in 2000, the valuation of the U.S. stock market exceeded current levels, but at that time, the premium of the U.S. stock market relative to other global markets was not as exaggerated as it is now.

Sharma stated that relative to some countries, such as those in Europe and Japan, this premium is reasonable because the U.S. economy is growing faster; however, relative to many developing countries, the slower growth of the U.S. economy makes this premium unreasonable.

In the past, including the 1920s and the internet era, the rise of the U.S. stock market typically drove growth in other markets, whereas today, the prosperity of the U.S. stock market is instead siphoning off funds from other markets. For smaller markets, capital outflows can weaken the national currency, forcing central banks to raise interest rates, slowing down the economy, and making the fundamentals of that country appear worse.

Moreover, the appeal of the U.S. in global bond and private markets has reached unprecedented heights.

So far in 2024, foreign capital is flowing into the U.S. bond market at an annual rate of $1 trillion, nearly double that flowing into the Eurozone; currently, the U.S. has also attracted over 70% of private investment inflows, with the size of the private investment market reaching $13 trillion.

Sharma acknowledged that the strong profitability of top U.S. companies, their global market share, and leading technological innovation capabilities do partially support the position of the U.S. stock market globally, and these advantages undoubtedly exist. However, the problem is that the market's worship of "American exceptionalism" has gone too far. Sharma wrote:

One definition of a "bubble" is: a once good idea that has gone too far.

Worse still, Trump's imminent return to the White House further exacerbates this trend—investors believe that Trump's proposed plans to raise tariffs and lower taxes will further boost the market, and after Trump's victory in November, the U.S. stock market experienced its strongest monthly performance.

Undoubtedly, this has raised concerns for Sharma:

Like all bubbles, it is difficult to know when this bubble will burst or what factors will trigger its collapse