US Equity Outperformance Illusion: Earnings Sustainability Over Market Noise

In this conversation with Sharmin Mossavar-Rahmani of Goldman Sachs, the core thesis emerges: while US exceptionalism in growth is undeniable, its translation into consistent equity outperformance is a complex, non-linear phenomenon. The hidden consequence revealed is that focusing solely on headline growth figures or short-term market noise can lead investors astray, obscuring the fundamental drivers of sustainable returns. This analysis is crucial for sophisticated investors and financial professionals seeking to navigate global markets by understanding the subtle interplay between earnings, valuations, and macroeconomic shifts, offering a strategic advantage in aligning portfolios with long-term economic realities rather than fleeting market sentiment. Those who grasp these dynamics can build more resilient portfolios, identifying opportunities where others are misled by superficial data.

The Illusion of US Equity Dominance: Earnings vs. Enthusiasm

The narrative surrounding US market performance often centers on its perceived exceptionalism. In 2025, this held true for economic growth, with the US outperforming global consensus. However, on the asset side, US stocks, despite a significant 18% rise, lagged behind their international peers, with developed markets up 22% and China soaring 33%. This divergence, where headline returns tell a different story than underlying earnings, is where the true analytical challenge lies. Sharmin Mossavar-Rahmani highlights this disconnect, noting that US earnings grew a robust 12%, supporting the 18% stock return, but non-US developed markets saw only 2% earnings growth alongside their 22% stock appreciation. China presented an even starker contrast, with stocks up 33% while earnings declined.

"Our view is that at the end of the day, prices follow earnings. And so you could have these short-term movements, but at the end of the day, you want to make the bet where the earnings are going to be sustainable."

This observation is critical. It suggests that short-term market movements can be driven by factors disconnected from fundamental business performance, such as speculative enthusiasm or capital flows. The implication for investors is clear: a focus on earnings sustainability offers a more reliable path to long-term returns. While the US has historically shown preeminence, it's not a linear guarantee of annual outperformance. Since the Global Financial Crisis, US equities have underperformed developed and emerging markets nine times. This historical pattern underscores the need for diversification and a nuanced understanding of market dynamics beyond simple national narratives. For 2026, the expectation is for non-US developed markets to lag in both earnings and returns, with the US in the middle and emerging markets, particularly ex-China, outperforming. While the projected return differences (US at 7%, EM at 8%) are modest, the qualitative difference in earnings growth--strong in the US, weaker elsewhere--reinforces the strategic preference for US assets, albeit within a diversified framework.

China's Growth Paradox: Reality vs. Reported Figures

The case of China's equity market in 2025 serves as a potent example of how market performance can diverge dramatically from economic fundamentals. While Chinese stocks surged 33%, earnings were actually down. This disconnect raises serious questions about the accuracy and interpretation of China's economic data. Mossavar-Rahmani points to discrepancies between official growth figures (around 4.8-5%) and estimates from respected sources like Rhodium Group (2.5-3%) and Jonathan Anderson (around 1% in mid-2025). The long-term forecast for China's trend growth is projected at 3%, declining to 2% by 2035--a rate that could be outpaced by US GDP growth, especially with AI contributions.

This projected slowdown in China's growth is a primary reason for caution regarding its equity markets. Furthermore, the closed nature of China's financial market, where households have limited options beyond domestic banks, equities, and gold, can artificially inflate asset prices. Government encouragement for domestic institutions to invest in equities adds another layer to this dynamic. The analysis suggests that this outperformance is not sustainable, as prices cannot indefinitely decouple from earnings.

"When we look at trend growth for the next 10 years, our base case is about a 3% growth rate. And they end up in 2035 at about 2% GDP, which will be lower than trend growth numbers in the US..."

This insight is crucial for investors who might be tempted by headline-grabbing returns. The implication is that understanding the underlying economic drivers, and critically evaluating the data, is paramount. Relying on official statistics without cross-referencing with independent analysis can lead to misallocation of capital. The tactical tilt towards emerging markets ex-China, alongside specific countries like South Africa, India, and Mexico, reflects a strategy that seeks growth where earnings are more robust and currency depreciation headwinds are expected to abate.

Navigating the AI Hype: Separating Signal from Noise

The Artificial Intelligence (AI) ecosystem in 2025 presented a significant challenge for investors: discerning genuine technological advancement from speculative boosterism. Mossavar-Rahmani emphasizes the difficulty in separating fact from hype, particularly regarding short-term productivity gains and job displacement. The example of AI improving physical childcare productivity by 21% highlights the often-unrealistic expectations surrounding AI's immediate impact.

The most pronounced "bubble-like features," such as vendor financing and easy credit availability, are observed more in private markets than in public ones. In public markets, while concentration in AI-related stocks like the "Magnificent Seven" has benefited returns, the analysis suggests this concentration hasn't statistically hindered forward-looking returns. In fact, the S&P 500 ex-Magnificent Seven still delivered a strong 15% return in 2025.

"However, in the AI ecosystem, we think there is too much excitement and hype."

The recommendation for investors is not to abandon the AI theme but to maintain a balanced approach. Overweighting the Magnificent Seven is not advised; instead, broad market-cap exposure through the S&P 500 is preferred. The index's self-correcting nature, continuously adding strong performers and removing weaker ones, makes it a difficult benchmark to beat. This perspective suggests that while AI will undoubtedly be transformative, investors should temper short-term expectations and focus on companies with sustainable business models that can leverage AI effectively, rather than chasing the most hyped names. The risk lies in investing based on narratives rather than demonstrable value creation.

Actionable Takeaways for Strategic Investing

• Embrace Earnings as the Primary Driver: Prioritize investments in companies and markets demonstrating sustainable earnings growth. This means looking beyond headline stock returns to fundamental business performance. (Immediate Action)
• Diversify Globally, Strategically: Maintain an overweight to US assets as per historical preeminence, but ensure meaningful exposure to non-US developed and emerging markets, particularly those ex-China, where earnings prospects are more favorable. (Ongoing Strategy)
• Scrutinize China's Economic Data: When evaluating China, cross-reference official growth figures with independent analysis to gain a more realistic understanding of its economic trajectory and market potential. (Analytical Practice)
• Temper AI Expectations: While AI is a significant theme, avoid excessive hype. Focus on broad market exposure and companies with proven business models rather than chasing speculative AI ventures, especially in private markets. (Short-term Tactical)
• Leverage US Treasuries for Stability: For portfolio diversification and risk mitigation, US Treasuries remain the most reliable "sleep well money," offering a better hedge than gold in deflationary environments. (Strategic Allocation)
• Re-evaluate Gold's Role: Recognize that gold is not a consistent long-term inflation or growth hedge. While tactical opportunities may exist due to central bank buying, its strategic value in a diversified portfolio is limited. (Strategic Re-evaluation)
• Invest in Private Assets Realistically: When allocating to private markets (private equity, credit, infrastructure), set realistic return expectations, anticipating incremental gains a few percentage points above public market equivalents, rather than mid-teen returns. (Long-term Investment Horizon: 12-18 months for portfolio adjustment)