Could the high valuation of US stocks also be driven by simply more money in the markets? I would love to hear your take on how both fractional shares and index funds have increased the amount of money in the market, and thus valuations.
I don't think it is about money in the markets, though I do think that there are many more retail investors in the US market than in europe and other countries (though I can't find any data that confirms this).
"More money in the market" should flow towards all assets worldwide, however, as rational actors would want to seek out the best risk-adjusted returns anywhere in the world. They do not explain why ex-US developed market valuations are so low.
I agree, Joachim. In fact, when you strip out the tech sectors (tech + communications), valuations for US companies are similar to valuations for ex-US developed markets.
It is hard for me to see how high valuations are not mostly the result of money flowing into the market through 401(k) Plans, IRA Accounts, and 529 Plans. I cannot think of any period in US history where there has been such large inflows into a captive product. The average investor has been told to just index the S&P 500 and be done with it - which by and large they have done. The average 401(k) investor is neither informed nor rational, thus they made a decision and stuck with it. Now what will be interesting is what happens when the Boomers start taking money out of stocks.
Certainly, #2 is a factor since FCF mishandles stock compensation. Moreover, as Dr. John Hussman has chronicled, the primary catalyst for the rise in profits and FCF was the decline in interest rates ... which went in reverse these past four years (the chart appears to only carry through the end of 2022) -- both measures are at serious risk of a downshift, exacerbated by the deglobalization trend ... all of which undermine the case for "valuation multiples increase and remain permanently high."
Could the high valuation of US stocks also be driven by simply more money in the markets? I would love to hear your take on how both fractional shares and index funds have increased the amount of money in the market, and thus valuations.
I don't think it is about money in the markets, though I do think that there are many more retail investors in the US market than in europe and other countries (though I can't find any data that confirms this).
But I have previously written about how the rise of ETFs distorts valuations in favour of megacaps: https://klementoninvesting.substack.com/p/the-butterfly-effect-index-funds
"More money in the market" should flow towards all assets worldwide, however, as rational actors would want to seek out the best risk-adjusted returns anywhere in the world. They do not explain why ex-US developed market valuations are so low.
I agree, Joachim. In fact, when you strip out the tech sectors (tech + communications), valuations for US companies are similar to valuations for ex-US developed markets.
Nice approach to this anomaly.
It is hard for me to see how high valuations are not mostly the result of money flowing into the market through 401(k) Plans, IRA Accounts, and 529 Plans. I cannot think of any period in US history where there has been such large inflows into a captive product. The average investor has been told to just index the S&P 500 and be done with it - which by and large they have done. The average 401(k) investor is neither informed nor rational, thus they made a decision and stuck with it. Now what will be interesting is what happens when the Boomers start taking money out of stocks.
Certainly, #2 is a factor since FCF mishandles stock compensation. Moreover, as Dr. John Hussman has chronicled, the primary catalyst for the rise in profits and FCF was the decline in interest rates ... which went in reverse these past four years (the chart appears to only carry through the end of 2022) -- both measures are at serious risk of a downshift, exacerbated by the deglobalization trend ... all of which undermine the case for "valuation multiples increase and remain permanently high."