Expensive But Compelling: The Long-Term Case for US Equities

It’s easy to turn bearish on US equities if you read the news or focus on valuations and the long list of worries markets always need to navigate.  

Be careful with this type of thinking.  

Powerful earnings growth across the S&P 500, widening market participation and an extraordinary AI investment cycle suggest investors should think carefully before turning bearish on the world’s largest equity market and unrivalled innovation machine. 

Questions to Be Asked 

There’s an uncomfortable tension at the heart of the US equity market in 2026. 

Share prices have risen strongly, valuations are above historical averages and vast sums are being committed to AI and the required infrastructure before the eventual returns are fully known.  

For investors who’ve already benefited from the past decade of US market leadership, taking profits and looking elsewhere may well feel like a prudent move. 

That may or may not be a sensible move in the short term. 

But if you’re genuinely investing with a long-term investment horizon, it’s surely worth standing back from the noise to look at the miracle that is corporate America from afar. 

Earnings are Doing a Lot of the Work 

The first question to ask of any consistently rising market is: What’s driving it? Is it earnings or investor sentiment? 

Importantly, the main support for the US market is not investor sentiment or enthusiasm.  

It’s corporate profitability, as shown below. 

On that note, check out the extraordinary earnings growth reported by the S&P 500 over the past quarter of a century: 

2026 is emerging as a particularly strong year for S&P 500 earnings growth.  

Goldman Sachs expects 24% growth this year, followed by a further 13% increase in 2027. AI is a major driver. They expect companies benefiting from AI infrastructure spending to generate roughly half of the expected 2026 earnings growth. 

Moreover, recent earnings growth hasn’t just been driven by revenue growth; S&P 500 profit margins have almost doubled since 2004.  

This is an important point to understand. 

Higher margins are generally associated with higher-quality businesses, so there’s an argument to be made for a gradual improvement in the quality of the entire S&P 500 since the start of the century. 

That in itself could form the justification for higher-than-average valuations. 

AI has Evolved into an Economy-Wide Investment Cycle 

AI has also evolved into a vital part of the US equities investment case. 

This thematic has moved beyond the AI hyperscalers to encompass an entire emerging ecosystem of businesses supporting the rollout. 

J.P. Morgan Asset Management estimates that the five biggest American hyperscalers could spend US$697 billion in 2026, US$173 billion more than analysts expected at the start of the year.  

This is providing a major boost for the US economy. AI investment now accounts for more than 25% of this year’s US GDP growth and a record ~8% of US GDP, the largest contribution on record.  

By way of comparison, spending on IT equipment, software and R&D peaked at ~6.5% of US GDP during the 2000 dot-com bubble. 

This AI investment is being spent on a vast array of products and services including chips, data centres, electricity generation, transmission equipment, cooling systems, networking, engineering, construction and cybersecurity. 

In short, it’s a generational investment cycle that extends well beyond software.  

For investors wanting exposure to this cycle, broad-based global equity exposure may capture more of the AI build-out than a narrowly defined US technology allocation, while reducing dependence on any one company or market segment successfully monetising its investments. 

The Rally is Broadening 

The extraordinary influence of the Magnificent Seven (Mag7) has created a reasonable concern that the US market is dangerously reliant on a small group of businesses. 

Concentration remains a genuine risk, although recent US performance has broadened with the Mag7 weighting falling by a couple of percent to 33.7% of the S&P 500. 

Moreover, the 493 companies outside the Magnificent Seven have generated some 96% of the S&P 500’s 2026 year-to-date return.  

That’s market broadening in all its glory. 

In particular, smaller companies and AI infrastructure plays have outperformed the largest technology names in recent months.  

That’s a healthier market backdrop than a rally carried by one or two dominant stocks.  

Valuation is the Strongest Argument for Caution 

Whilst valuation rarely determines short-term market direction, there comes a point when it does. 

The question is: Are we at that point? 

Let’s check out the data.  

According to FactSet, the S&P 500 is currently trading at a one-year forward price/earnings ratio of 20.5x, as shown below. 

This is slightly expensive in historical terms, but not at extreme levels versus the five-year average of 19.9x or the 10-year average of 18.9x.  

So, it’s hard to argue that the US market is currently at a valuation extreme, or that it’s cheap.  

Against this backdrop, bad news could be punished quickly. If US earnings forecasts were to be revised downwards, AI expenditure were to slow, an inflationary shock were to emerge, the Fed were to raise rates higher than expected, geopolitical risk were to flare up again, or consumer demand were to take a hit, US valuation multiples could easily fall back to the 10-year average or below. 

But in the absence of those negative catalysts emerging in the short term, it’s also possible that the US market continues grinding higher through to the end of the year driven by this extraordinary AI capex cycle and broader earnings upgrades. 

The argument for remaining long-term bullish on US equities, therefore, remains as strong as ever.  

Navigating Currency Risk is an Additional Variable for Australian Investors 

Australian investors face an additional variable when investing in US equities: currency. 

An unhedged US investment rises in Australian-dollar terms when the US dollar strengthens against the Australian dollar, all else being equal.  

In contrast, a stronger Australian dollar can reduce or offset gains from the underlying US shares.  

Hence, currency can diversify returns, but it can also introduce substantial short-term volatility. 

Neither hedged nor unhedged exposure is inherently superior. The appropriate structure depends on the role of the allocation, an investor’s existing currency exposure, costs and time horizon.  

An Enduring American Bull Case 

Whilst it’s hard to argue the US market is cheap, it remains compelling because it combines deep capital markets, highly profitable companies, technological leadership and a unique capacity to direct investment towards innovative opportunities with truly global markets. 

Importantly, American earnings growth remains powerful, AI spending is spreading into multiple industries, and market participation has broadened beyond the largest technology stocks. These are fundamental elements of the long-term bull case. 

Equally, there are short-term risks worth being aware of. A recession, a policy mistake, an AI spending slowdown, or a sharp sentiment reversal could challenge the bullish case in the short term. Investors should also avoid mistaking a positive long-term outlook for a reason to concentrate their entire portfolio in the one country. 

Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.