One big reason US stock market exceptionalism is here to stay
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- Goldman Sachs says US exceptionalism in stocks will persist despite the S&P 500's lagging this year.
- Goldman notes that US firms' higher R&D investment boosts growth in the long term.
- US companies lead in return on investment, which helps drive long-term innovation.
The US exceptionalism trade looks likely to persist, despite fears that America's stock market dominance is waning as international stocks outperform the S&P 500 this year.
That's according to Goldman Sachs, which highlighted a key advantage American companies have over their international peers: returns on investment in research and development and other areas meant to grow their business.
David Kostin, the chief US equity strategist at Goldman Sachs, highlighted that firms within the S&P 500 had a growth investment ratio nearly double that of other global equity markets.
Those staggering research and development costs can unlock significant growth down the road.
"The Growth Investment Ratio is greater in the US (42%) than Rest of World (26%) and the gap has been steadily widening in recent years," Kostin said.
Goldman Sachs
Kostin calculates the growth investment ratio by adding growth capex, which is capital expenditures less depreciation, to R&D costs as a share of cash flow from operations.
In addition, the return on investment for US-based companies is higher than that of their international peers, at 80% compared with 73%.
In other words, American companies are investing more in their future and getting a better return on their investments than their overseas peers.
That's key to continuing the American exceptionalism trade, as the US continues to lead in the biggest industries and in cutting-edge technologies, including AI, quantum computing, and biotech research.
"Maintaining US equity market exceptionalism will require both the magnitude of growth investment and the returns on those investments to remain elevated during the next several years," Kostin said.
The call from Goldman Sachs contrasts with other Wall Street firms that are worried about the economic impact of President Donald Trump's uncertain trade policies.
Earlier this month, Citi strategists recommended that investors take profits in US stocks and load up on Chinese stocks because of the expected unraveling of the US exceptionalism trade.
But Morgan Stanley also noted this week that a resurgence of US tech stocks could ultimately pave the way for a refresh of US stock market dominance.