U.S. May Be a Fixer-Upper, But It's Still the Best Property in the World
Despite some serious structural problems, the nation is a better bet than much the rest of the globe, including Japan, China, and the EU.
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My regular readers know I am not sanguine about the equity market at current valuations. Stocks trade at extreme levels using a variety of historical valuation metrics including Shiller price-to-earnings ration and the S&P 500 price-to-sales ratio. In addition, with U.S. growth projected to be around 1.5% in 2025 and 2% in 2026, it is hard to see how current earnings growth projections can possibly be met.
Earnings growth in the S&P 500 is projected to be around 14% in 2026. Given anemic global growth, the impacts of new tariff policies and a struggling consumer make that bogey all but impossible to hit in my opinion. That said, the U.S. to a large degree, seems to be the best house in a deteriorating global neighborhood. In today’s column, I will highlight some of the key problems with the other major economies.
Let’s start with the country I am most concerned about, Japan. The Land of the Rising Sun has a debt to ratio of north of 250%, more than twice that of the United States. Despite that, it pays a much lower interest rate on that enormous debt load. Add in the second oldest population of any country on the globe, which is right at 50 years of age; and a dependence on imports for the vast majority of its energy needs; it is a potentially toxic mix. Any spike in interest rates or energy prices could send this anemically growing economy into a significant tailspin. This could have global ramifications. New U.S. tariffs on its manufacturing base is also not helpful on the margin.
China shares many traits with Japan, even if its economy is growing at a much faster clip. Its population is rapidly aging. The median age of the country has moved up sharply in recent decades to approximately 40 years, thanks largely to the nation’s one child policies that were in place for decades. Counting regional government debt, its debt-to-gross-domestic-product ratio is right around 300%. It too is quite dependent on energy imports, needing more than 11 million barrels of oil daily from outside its borders. New U.S. tariffs and growing trade tensions with Europe are new headwinds.
Then we have Europe itself. Overall, its debt to GDP ratio is lower than the U.S. But this is likely to narrow in the years ahead as the continent massively ramps up spending on defense. Europe has grown significantly less than the U.S. consistently over the past generation. The continent has lousy demographics, and the region is having substantial challenges absorbing its mass immigration over the past decade. This is leading to the rise of populist parties across Europe.
Green environmental policies have led to much higher electricity prices than in the U.S. The loss of cheap Russian energy supplies due to the Ukraine conflict, have boosted this divergence substantially. German industrial electricity averages some four times that of the U.S. New tariffs will be another substantial challenge to navigate in the years ahead.
India seems to be the only large country with favorable demographics as the nation’s average age is under 30. The country might one day rival China as a manufacturing hub. But that day is a long way off due to the lack of modern infrastructure like ports and highways. The country also is heavily energy dependent.
So, in short, while I consistently highlight the substantial challenges the U.S. currently faces in my columns. I am well aware the country is the best house in a crumbling global neighborhood and the best one for investors in my view over the long term.
At the time of publication, Jensen had no position in any security mentioned.
