On U.S. Stocks

Past performance does not guarantee future returns

Disclaimer: the content of this blog post is for informational purposes only and should not be construed as financial advice. It is the author’s opinion on one specific investment instrument (U.S. stocks) and is not a recommendation to buy, sell, or hold any securities. If you are interested in investing in U.S. stocks, we are not saying that you absolutely can or cannot make good investment returns, consider consulting your financial advisor before making any investment decisions.

Many have asked whether we will offer services for U.S. stocks.

These are completely understandable remarks, as over the past decade, U.S. stocks have significantly outperformed Indonesia’s—even when excluding the forex loss from USD to IDR.

However, after doing some research, we will not launch the service in near future. The primary reason for this decision is the extreme valuation risk currently associated with U.S. stocks, particularly over the past four years.

At Recompound, we pay heed to the investment principle Warren Buffett famously preached: “Price is what you pay, value is what you get.”

No matter how high the quality of an asset, overpaying relative to its intrinsic value will inevitably lead to poor investment returns.

Our research indicates that the U.S. stocks are considerably overvalued. In this article, we are going to outline some key insights below. However, before you go on and read the details, do bear in mind that even though the market is overvalued, it does not mean that there is no investment opportunity.

We are also not saying that you will not be able to make money from the U.S. market. What we are saying is that: for us, the risk of investing in U.S. stocks now is too high.

With all that out of the way, let’s begin.

U.S. Stock Price Performance Dominates Globally

The relative price performance of U.S. stocks compared to non-U.S. stocks is at a 75-year high. This historical perspective underscores the extent of the current overvaluation.

Some might argue, “Perhaps the U.S. stocks are overvalued for a good reason —maybe their corporate earnings are significantly stronger than the rest of the world?”

U.S. Corporate Earnings are Great, But Not Exceptional

The data tells a different story. U.S. stocks are now trading at over 22x forward earnings, compared to 14x for stocks in the rest of the world.

This is the widest valuation gap since 1995, surpassing even the dot-com bubble era of the early 2000s and the 2008 subprime mortgage crisis.

Historical Overvaluation

From a historical perspective, U.S. stocks are also relatively overvalued, particularly in the technology sector.

The current forward P/E ratios for major U.S. stocks indices like the Nasdaq 100, Russell 2000, and S&P 500 are near the top of their 20-year ranges. This indicates that U.S. stocks are expensive relative to their earnings.

Record-High Stock Ownership

Approximately 40% of the U.S. population owns stocks, the highest level since the 1950s. The chart above shows that stocks held by households and nonprofit organizations as a percentage of financial assets are at historically high levels. This suggests that a significant portion of financial assets of Americans are tied up in stocks.

If nearly everyone already owns U.S. stocks, who else will drive prices higher? ??

Past Performance Does Not Guarantee Future Returns

A graph from J.P. Morgan Asset Management illustrates the relationship between starting valuations and subsequent returns. Each square represents a month from 1988 through late 2014, totaling 324 monthly observations (27 years x 12). The graph reveals two critical insights:

1. Strong Relationship Between Valuations and Returns: Higher starting valuations consistently lead to lower subsequent annualized ten-year returns, and vice versa. While there are minor variations, there are no significant exceptions to this trend.
2. Today’s Valuations Are Extreme: The current P/E ratio is well into the top decile of historical observations. In the past 27 years, when investors bought the S&P 500 at P/E ratios similar to today’s multiple of 22x, their ten-year returns ranged between +2% and -2%.

How Long Will This “Overvaluation” Last?

Honestly, we don’t know—and we don’t need to know.

But here’s what we do know:

1. It is impossible to time market tops or bottoms: Trying to predict the exact peak or trough of a market is a fool’s errand. Even the most seasoned speculators have struggled with this.
2. Markets eventually revert to their intrinsic value: An overvalued market will eventually decline, just as an undervalued market will eventually rise. History has shown time and time again that valuations matter in the long run.

Staying Patient and Prudent

At Recompound, our fee structure is directly tied to our customers' portfolio growth. We only earn when our customers’ portfolio grows. This alignment of interests means that taking excessive risks is simply not an option for us. Instead, we focus on taking calculated risks and aim to win over the long term.

While this conservative approach might invite cynicism & ridicule in the short term, we are confident that it is the most sustainable and responsible way to achieve durable investment success.

Conclusion

The allure of U.S. stocks is undeniable, but we believe it is more prudent to wait for a better risk-reward scenario before entering. At Recompound, our commitment is to your long-term success—not to chasing short-term trends. We will continue to monitor the market closely and keep you informed of any developments that present attractive opportunities.

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If you are interested in learning more on what we do, please do not hesitate to have a chat wit us here ?? :

https://calendly.com/recompound/30min