Margin Resilience Is Key
This year U.S. equities have underperformed the rest of the world due largely to policy uncertainty. However, an important driver of U.S. equity outperformance over the longer term has been stronger earnings and profit margins relative to peers, and our view is these factors will continue to drive long-term U.S. exceptionalism.
3 mins Reading time
Published on 25 June 2025
U.S. equities have had a challenging first half of the year, underperforming the rest of the world. A primary cause of this underperformance has been higher policy uncertainty and concerns about the impact of higher tariffs on growth.
While policy uncertainty can impact short-term volatility and lead to temporary underperformance, what does this mean for returns over the long term? An important driver of long-term returns is earnings and profit margins, where the U.S. has continued to outperform. In fact, since 2010 margins increased 6.4% to 13.5% as compared to a 2.7% increase in Europe to 10.1%. The difference between U.S. and European margins is now 3.4%, near the highest in history.
Additionally, technology leadership and increased adoption of artificial intelligence (AI) across diverse industries will likely support the continued expansion of U.S. margins, allowing them to surpass the rest of the world. Considering the many ways AI can improve profit margins for businesses, we anticipate that 2025 S&P 500 earnings per share will come in at $260-$270, demonstrating positive growth of roughly 8% as strong earnings and margin expansion continue to drive U.S. exceptionalism into the future.
759433 Exp : 25 June 2026
YOU MIGHT ALSO LIKE
Last Friday, Federal Reserve Chair Jerome Powell described a shift in the balance of employment and inflation risks, and the market rallied on the news. For us, nothing has changed. We have been closely monitoring the labor market and indicators of inflation, and we continue to expect two rate cuts this year.
Second quarter earnings season is winding down. Nearly all companies have reported, and the majority beat expectations as margin estimates continue to rise.
Second quarter earnings season is winding down, but earnings are up, and better than expected. Despite some potentially concerning signals from the real economy, including muted job gains, and possible seasonal volatility, we remain constructive on equities. A positive second quarter earnings season strengthens our conviction.
Last week the market received mixed messages about the condition of the labor market. Nonfarm payrolls came in lower than expected, and the previous two months of data were revised sharply lower. Yet initial jobless claims were also lower, and the unemployment rate remains in range. We believe the U.S. economy can still deliver modest growth this year.
