Bridgewater: The Drivers of US Exceptionalism

In their recent article, the team at Bridgewater analyzes the exceptional performance of US equities over the past decade, breaking down the key drivers of outperformance and discussing the outlook for continued success.

They examine the extraordinary outperformance of US equities over the past decade, with the S&P 500 delivering returns of over 600% since 2010 and significantly outpacing other developed markets. It attributes this success to three main factors: faster revenue growth, bigger margin expansion, and rising P/E multiples.

Here are the key takeaways:

• US equity outperformance drivers: The exceptional returns of US equities were driven by a combination of faster revenue growth, larger margin expansion, and rising P/E multiples, with each factor contributing roughly equally.

• Role of US companies and policy: US companies demonstrated superior efficiency, innovation, and capital deployment compared to global peers. This was supported by a favorable pro-corporate environment, including tax cuts and fiscal policies that boosted corporate profits.

• Technology sector impact: While US outperformance was broad-based, the technology sector played an outsized role, accounting for more than half of the total outperformance. The growing weight of tech in the S&P 500 (from 20% to 40%) significantly impacted overall index performance.

• Higher expectations priced in: The strong performance has led to higher expectations being priced into US equities, setting a higher bar for future outperformance. US companies now need about 7% EPS growth to generate a normal risk premium, compared to 3% for other developed markets.

• Future outlook: Continued US outperformance faces challenges as many past drivers (e.g., globalization, tax cuts) may not persist. Future success heavily depends on the technology sector’s ability to deliver, particularly through AI-driven productivity gains across various sectors.