Study: United States Exceptionism

American Tailwind

125 years have passed since 1900, during this time the US has been an exceptional place to do business, supported by productivity and population growth with world-leading innovation and powerful geopolitical advantages.

Two defining moments were both World Wars which saw the US project both hard and soft powers on the world stage.

Domestically, the US has fostered a uniquely business-friendly legal and regulatory environment, encouraging entrepreneurship, protecting property rights, and supporting deep capital markets.

The US possesses tremendous natural resources, and intellectual ones too, with roughly half of all Nobel prizes awarded to researchers living in the US. This combination of economic dynamism, technological leadership, and institutional strength form the fundamental backdrop to the prevailing belief in US exceptionalism.

The US stock market (measured by S&P500 index) has delivered tremendous inflation-adjusted real returns: 6.8% over the past 125 years, the highest among all major global stock markets (nominal returns 10%). It is not surprising that 9 out of 10 of the world’s largest companies by market capitalization are US companies.

Corporate Earnings

As a result, America's GDP has been growing at 3.2% per year post WW2 (1947 – 2025). We might think that US companies have been surfing this tailwind to generate exceptional earnings growth.

However, data suggests that real earnings growth was only 3.3% per year. This number tracks the GDP growth, but there's an important point to consider that US companies on average retained 48% of earnings for reinvestment.

So if the stock market real returns were 6.8%, then we can suppose that 48% retained earnings should generate 3–4% on top of the 3.2% GDP tailwind.

So if US companies benefited from the full tailwind, we should see at least 6% real earnings growth. A far cry from the actual 3.3%.

Another way of seeing the unexceptional earnings performance is to look at actual versus expected market returns.

Let's imagine that US companies paid out all their earnings as dividends, with no earnings boost from the exceptional economic environment, then their expected earnings growth will be just the rate of inflation.

So if you invested in the US stock market in 1947 under this set of assumptions, then you must expect to earn a long-term real return equal to the earnings yield of the US stock market, which was about 7–11%.

And that largely explains the long-run 10% nominal returns, with an extra 1.5% explained by changes in PE multiples.

Conclusion

While the US has indeed enjoyed exceptional economic environment for a long time, US companies as a group did not fully leverage it into corporate earnings growth.

If this holds true in the future too, it implies that the market’s earnings yield serves as a simple and useful estimate of the long-term nominal returns.

From 1900, the US real stock market returns have been great, but are almost entirely explained by their high starting earnings yield of 8%. In contrast, today’s earnings yield of 3.5% predicts low long-term real returns, especially relative to safer assets.