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When you buy a stock, the price you pay implies a certain path of how the future will unfold. To earn outsized returns in the stock market, the company’s future has to play out better than what is already discounted in the price you pay for it.
As we step into 2025, I want to share with you what is priced into global stocks in five simple charts. My two big takeaways:
- US stocks are already expected to massively beat stocks in other countries. US stock prices reflect expectations of continued strong earnings growth, much stronger than what is expected for other equity markets. This means that other countries’ companies that perform relatively poorly in earnings can still beat US companies in price performance.
- Big trends that everyone seems to be talking about—like AI and tariffs—are not necessarily reflected in stock prices. When you look at the technology sector, there isn’t much differentiation between what’s priced for AI-focused names and the broader sector. And the “Magnificent Seven (Mag 7)”—Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla, which includes of some of the largest AI leaders in public markets—are priced to grow at a slower pace than they have been in recent years (although even that slower pace is faster than what is priced for the other 493 S&P 500 constituents). Similarly, companies likely to be exposed to Trump’s tariffs aren’t priced to grow earnings very differently than companies we’d consider tariff winners, but the specific policies matter tremendously here and this remains an active area of research.
This pricing creates opportunities. In terms of where to invest, investors are highly concentrated in the US when diversifying into other countries’ stocks has a much better risk/return profile; diversification is basically a free lunch today. And within the US stock market, if you think that AI and the shift to protectionism are likely to be a big deal, there is an opportunity to profit from buying the stocks that will benefit from these shifts.
Would love to hear from you what’s on your mind going into 2025.
Karen Karniol-Tambour
Co-Chief Investment Officer, Bridgewater Associates
The Global Stock Market in 5 Charts
Every investor knows the price they pay for an investment implies a certain path the future will take; a high multiple, for example, reflects that a company is expected to grow. So, investors need to pay for that expected growth relative to a company the same size that is expected to remain stagnant. There is no precise way to determine what is expected from a company given its stock price, but one methodology we find useful is to look at today’s prices and earnings per share and derive what future level of EPS growth would produce a normal (3%) return above bonds. If stocks return less than 3% or so above government bonds, that means investors aren’t getting much compensation for the additional risk they’re taking on.
In these five charts, we show what is priced into the global stock market going into 2025 using this methodology. In each chart you can see (a) the last ten years’ realized EPS growth (solid lines), and (b) what EPS growth over the next ten years would be required to earn a normal return over bonds (dashed lines).
Earnings Growth and What’s Required for a Normal Return Above Bonds
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