The U.S. stock market has delivered impressive returns over the last 15 years. In fact, the S&P 500 has returned a staggering 13.0% per annum over that period. But after attending Allan Gray’s recent investment update, one message stuck with me: “My biggest concern with the U.S. market is not tariffs, but the high valuations.” It’s a fair point. With the market near all-time highs, investors need to ask: Where have these returns come from—and can they continue?
The Anatomy of U.S. Market Returns
Since 2011, the S&P 500’s performance has been driven by a few key components:
- Sales growth: +5.1% p.a.
- Profit margin expansion: +2.6% p.a.
- Valuation expansion (higher P/E ratios): +3.0% p.a.
- Dividends: +1.9% p.a.
In other words, it was not just companies growing their revenues and earnings. Investors were also willing to pay more for those earnings, pushing up price-to-earnings ratios and boosting returns. But here’s the challenge: valuation expansion is not sustainable forever. At some point, reality catches up—either through slower earnings growth, margin pressure, or shifting sentiment.
So, What Happens Next?
Valuations in the U.S. remain well above their historical average. While tech giants and AI-driven narratives continue to attract capital, future returns may look quite different from the past decade, especially if profit margins normalize and inflation remains sticky. On the flip side, markets outside of the U.S. are cheaper, and investor expectations are much more subdued. This creates a compelling case for global diversification.
Diversification: More Than a Buzzword
Take the Orbis Global Balanced Fund as an example. Its top 40 holdings (which make up 72% of the fund) are:
- Geographically diversified across the U.S., UK, Europe, Japan, and emerging markets
- Balanced by investment style – growth, value, and defensive positions
- Hedged across currency scenarios – strong-dollar winners, weak-dollar beneficiaries, and dollar-agnostic holdings
This matters because if all fund managers hold the same stocks, everyone ends up with the same results—and the same risks. Proper diversification ensures smoother returns, especially in uncertain markets.
Zooming In: South Africa’s Mixed Outlook
South African investors enjoyed an excellent start to 2024, with local bonds delivering around 18% in the first few months of the year. However, sentiment has since cooled.
Political uncertainty following the elections, fiscal pressures, and delays in key reforms have weighed on both the bond and equity markets. The ALSI’s year-to-date performance has been underwhelming, with consumer staples and other domestic sectors underperforming.
What Can We Expect Going Forward?
Investor optimism toward South Africa is fading. That does not mean there are not opportunities, but expectations need to be realistic.
Here’s what could support stronger returns:
- Clearer policy direction and political stability
- Progress on structural reforms, especially in energy and logistics
- Supportive global conditions (such as interest rate cuts in developed markets)
For now, volatility is likely to remain elevated, and returns may be more modest in the short term. But in that uncertainty, there may be value, particularly in quality local companies and fixed-income assets.
Final Thoughts
The U.S. may have led the charge in global equity markets, but the outlook is shifting. With high valuations, slowing momentum, and diverging global opportunities, diversification and selectivity are more important than ever. South Africa presents its own unique risks and opportunities, but the days of easy optimism are behind us. Now is the time for realistic, grounded investment strategies that look beyond headlines and into fundamentals.
Written by Sigrid
