Perhaps the "American exceptionalism" mindset is just hard to shake, but when looking at economic growth and earnings - two of the most important foundations for a robust stock market - the U.S. simply isn't outgunning its rivals to the extent that narrative might suggest.
U.S. earnings growth forecasts for the second quarter and calendar year 2026 are impressive. Year-on-year aggregate S&P 500 earnings growth forecasts for calendar year 2026 are running at a punchy 30%, before slowing to a still respectable 15% next year, according to LSEG's Tajinder Dhillon.
But other regions are also enjoying earnings booms – and not just AI-frenzied emerging markets like South Korea and Taiwan.
In Europe, UBS equity strategists predict 25% earnings growth this year and next, driven by a cyclical recovery and large-scale structural investment in areas such as AI, electrification, and defense.
The gap between the U.S. and European economies also isn't as wide as many would guess. While the U.S. looks quite healthy – perhaps too healthy – on a nominal basis, headwinds are gathering force, namely high real yields, sticky inflation, and policy credibility issues. Real GDP growth over the last few years has been on a clear downward path, to a 1.5% annualized pace in the second quarter of this year from almost 3% in 2023.
Meanwhile, the euro zone – often knocked as less dynamic than the all-powerful American juggernaut – grew 1.6% in the second quarter, slightly outpacing the U.S.
Citi's economic surprise indexes measure actual data prints relative to consensus forecasts, and the euro zone's is currently the highest in 3-1/2 years, while the U.S.’ is the lowest in three months.
In developed Asia, the relative attractiveness versus Wall Street looks a little less clear-cut. Japan’s robust equity performance this year comes with caveats, not least that the Nikkei slumped 8% last month. Japan has plenty of headwinds too, including a weak currency and policy credibility issues on both the fiscal and monetary fronts. Yet Citi's Japan economic surprise index this week soared to its highest level in five years, although a stronger yen and elevated bond yields might soon cap that.
Finally, there’s the issue of relative rates. Equity investors like low real interest rates, and they're getting that in the U.S., where the Federal Reserve's inflation-adjusted policy rate is around zero. But real rates in the euro zone and Japan are even lower, both around minus 0.7%.
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