US Rally Relieves—But Does Not Reassure

A quick survey of global equity performance drives home the point. Not only did US equities become worth less in the first six months of 2025, they also significantly underperformed global markets (Exhibit 2), with the S&P 500 up 5.5% versus the MSCI ACWI ex US Index’s 17.9%. Yet despite considerable underperformance, US stocks, with a trailing price-to-earnings (P/E) of 23.8x, continue to trade at a record premium to foreign markets, at 15.3x (Exhibit 3).

Exhibit 2: US vs. Global Market Returns

Sources: ClearBridge Investments, Bloomberg Finance. As of June 30, 2025. Past performance is not an indicator or a guarantee of future results.

Exhibit 3: US and Global P/E Ratios

Sources: ClearBridge Investments, Bloomberg Finance. As of June 30, 2025. Past performance is not an indicator or a guarantee of future results.

For US focused investors, it is easy to lose sight of global dynamics. But for foreign investors, these issues are front and center every day. Rising US equity markets may make American investors feel good, but they will not do any good if those investors are unable to maintain and grow their purchasing power. Continued US underperformance also risks becoming self-reinforcing. With US markets at all-time highs, foreign markets relatively cheaper than they have ever been and global investors over-indexed to US markets, it is easy to envision cascading outflows.

Suddenly, those warm and fuzzy feelings about first-half performance seem misplaced.

The S&P 500 currently trades at 22x forward 12-month earnings, a level matched only twice in the last 35 years: in 2021-2022 and in 2000 (Exhibit 4). Investors who put cash to work in those periods lost money over the ensuing 12 months.

Exhibit 4: US and Global P/E Ratios

Sources: ClearBridge Investments, Bloomberg Finance. As of June 30, 2025. On a blended forward 12-month basis. Past performance is not an indicator or a guarantee of future results.

The past is, of course, no guarantee of the future. Artificial intelligence (AI) could prove wondrous, tariff revenues could pay for tax cuts and geopolitics may be the risk that never comes home to roost. But with the demanding odds embedded in current stock prices, are investors sufficiently incentivized to bet that way?

Given all the challenges we face (tariffs, deficits, wars, etc.) and, more importantly, the inherent uncertainty of investing, buyers should demand better. US equities offer little margin of safety. If stocks returned to long-term average multiples, they would be 30% lower than they are today.

Suggesting the market could decline 30% undoubtedly sounds provocative, but is it crazy to suggest the market could trade in line with historical averages? To be bullish today, one must believe the market will sustain levels never previously sustained, rather than trade at the levels it usually trades at. When phrased like that, why would any risk-averse investor bet heavily on the former?

Against such a challenging backdrop, we recommend diversified portfolios of high-quality dividend growers. Touting diversification may sound trite, but diversification today is anything but commonplace. The most well-known benchmarks have become absurdly concentrated, and most portfolios mimic those benchmarks. Concentration leads to increased volatility, but robust dividends can provide an anchor to windward in stormy seas. Valuations for high-quality dividend growers are also, generally, less demanding.

Real assets stand out. With inflation expectations becoming entrenched and stagflation a growing concern, we believe real assets offer one of the few safe havens relative to the overall market. Real assets recoup increasing costs through price increases, while their in-place assets accrete value as replacement costs rise.

We particularly like energy and apartment real estate investment trusts (REITs). Energy companies screen reasonably on current earnings, despite weak commodity prices, and offer torque to rising oil prices. Apartment REITs benefit from higher interest rates and the residual effects of Covid-era inflation. Developers have slashed new projects as costs have increased, while rising mortgage rates keep home ownership out of reach and tenants renting longer. Apartment REITs offer reasonable dividend and cash flow yields, and rising rents are poised to drive earnings growth.

Investors pouring into AI, crypto and everything new remind us of past episodes of complacency and euphoria. Buyers frequently gravitated to the correct companies in those moments yet still walked away disappointed because of the prices they paid. Given the tremendous uncertainty and change we face today, US investors should be relieved with first-half performance; but, given record valuations, record concentration and attractively valued opportunities elsewhere, US investors must not become complacent.

A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.

Definitions

The Standard & Poor’s® 500 Index (S&P 500®) is a market capitalization-weighted index of 500 stocks designed to measure total US equity market performance.

The MSCI ACWI ex US is an index that represents the performance of large and mid-cap stocks across all developed and emerging markets, excluding those in the United States.

The price-to-earnings (P/E) ratio measures a company's share price relative to its earnings per share (EPS).

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Large-capitalization companies may fall out of favor with investors based on market and economic conditions. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.

Dividends may fluctuate and are not guaranteed, and a company may reduce or eliminate its dividend at any time.

Active management does not ensure gains or protect against market declines.

Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. Focusing investments in information technology (IT) and/or technology-related industries carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.

Risks of investing in real estate investments include but are not limited to fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by local, state, national or international economic conditions. Such conditions may be impacted by the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, and environmental laws. Furthermore, investments in real estate are also impacted by market disruptions caused by regional concerns, political upheaval, sovereign debt crises, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). Investments in real estate related securities, such as asset-backed or mortgage-backed securities are subject to prepayment and extension risks.

WF: 6322108

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Franklin Templeton has environmental, social and governance (ESG) capabilities; however, not all strategies or products for a strategy consider “ESG” as part of their investment process.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com. Investments are not FDIC insured; may lose value; and are not bank guaranteed.

You need Adobe Acrobat Reader to view and print PDF documents. Download a free version from Adobe's website.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

© ClearBridge Investments

Read more commentaries by ClearBridge Investments