After years of strong returns from US equities, the road ahead looks less certain. The question long-term offshore investors should be asking now is not only what worked in the past but what is priced to work in the future. According to Orbis, Allan Gray’s offshore investment partner, the most compelling opportunities may lie where expectations are lowest.
Given the stellar rise in the S&P 500 in the past decade, it is understandable that many investors still hold high expectations for US stocks. But shifting gear to low expectations – and truly diversifying your portfolio – is a better strategy for investors seeking to earn offshore returns at a time of heightened geopolitical risk, argues Rob Perrone, a senior investment specialist at Orbis.
For years, US stocks have been the darling of the investment community, thanks to the impressive performance of tech giants such as Microsoft, Nvidia and Apple, and boosted by high hopes of the benefits of generative artificial intelligence (AI).
“Over the past 15 years, the US stock market has come to dominate global passive portfolios, with its weight in the MSCI World Index rising from below 50% to nearly 75%,” says Perrone.
The rise in US shares has been driven by exceptional returns. “Since 2010, the S&P 500 has returned 13% per annum, much higher than markets elsewhere, exceptionally high versus its own history and inflation, and a near-record result against bonds and cash,” he states.
But it’s unlikely that such a success story is sustainable over the long term, particuarly given the massive sell-off that was triggered by news of US President Donald Trump’s tariff hikes on 2 April, followed by a relief rally as fears of a global trade war eased.
What’s behind the rise in US stocks?
To understand why US shares have done so well over the past 15 years, he believes it is important to analyse the fundamentals. “Equity returns come from just three sources: fundamental growth, changes in valuation, and dividends,” Perrone says.
In terms of sales growth, American companies grew sales by 5.1% a year from 2010 to 2025, and dividends contributed 1.9% a year to returns.
“I’ve got no quarrel with sales growth or dividends; those are pretty stable,” he adds. “But almost half of the S&P 500’s return came from expanding profit margins and rising valuations. Those are both cyclical; they’re both currently near record highs, and they can’t go up forever.”
Regarding valuation, there has been a sharp rise in the price-earnings ratio for shares listed on the S&P 500.
“In 2010, the S&P traded at 15 times trailing earnings,” Perrone states. “Valuations have since got much more expensive, and the US market now trades at 22 times earnings. That added 2.8% per annum to returns. For valuations to provide the same boost to returns over the next 15 years, the S&P would have to trade at 40 times earnings. That just doesn’t look realistic to us.”
But what if they fall to 20-year-average levels? If margins and valuations fall, the numbers suggest a long-term returns of 3.8% a year for the S&P – less than the yield on US Treasury bonds.
“Said another way, the broad US stock market is dependent on great expectations. Great expectations are already in the price, so to expect a great return, investors need to believe that reality will prove even more amazing than markets already expect.”
Better value elsewhere
Given that the phenomenal rise in American stock markets is unlikely to continue indefinitely and that the US dollar is currently overvalued, it makes sense for investors to diversify their portfolios. “When expectations are high, so is risk,” emphasises Perrone. “Fortunately, low expectations are easier to find pretty much everywhere else.”
Outside the US, he says stocks are cheaper across various geographies, sectors and by company size. Many fund managers are looking to markets such as Japan, which is experiencing strong corporate reforms and robust earnings growth, while a weaker yen is boosting exports.
Tariff volatility has left some babies thrown out with the bathwater. “If you look at a company like Mitsubishi Estate, its rents Tokyo office space for Tokyo office workers. This business has nothing to fear from tariffs, yet its shares were down sharply in March and April,” he comments. “Similarly, the Chinese brand ANTA Sports makes running shoes in China for runners in China – almost entirely domestic costs and domestic sales. What does this business have to fear from tariffs? In our view, not much, but its shares were down 26% at one point in April.”
These examples underscore the opportunities available for investors willing to embrace a greater degree of diversification.
“Although the US still offers value, it doesn’t hold a monopoly on high-quality businesses. Achieving true diversification is not about owning absolutely everything and hedging all your bets. Where assets are attractively valued, you want that exposure, and where they’re not, you don’t. Today, we see much more value in markets outside the US,” says Perrone.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute investment or financial planning advice that is appropriate for every individual’s needs and circumstances.
