The conflict between price and fundamentals

For all of the share markets’ turmoil in April, the S&P 500 is down just 2% from ‘Liberation Day’. As a result, US equities still trade at a 30% premium to international markets – priced at around 20 times expected earnings versus 15 times for their international peers. And that’s if you believe consensus earnings expectations, which have barely budged; estimates for US earnings this year fell just 1% in April. In the view of our sister company, Orbis, that looks like wishful thinking, because the fundamentals have changed and there’s a conflict between price and fundamentals. Find out why in the article below. This article was first published on 30 April 2025.

President Trump’s announcement of a sweeping array of reciprocal tariffs on April 2 rocked stockmarkets globally and sent US shares tumbling. While “Liberation Day” was flagged in investors’ calendars, both the magnitude and unorthodox calculation method of the tariffs took markets by surprise.

The S&P 500’s early April declines were severe, with the index falling 10% in the two days after the announcement. Even more dramatic were the moves in bond markets. Having played their safe haven role over the first two days, long-term US Treasuries sold off sharply amid crash-like trading conditions. In Trump’s own words, the bond market got a little “yippy”.

The US dollar, typically also a safe haven, didn’t fare any better, suggesting shaken confidence in American assets generally. With stocks, bonds, and the currency all dropping at the same time, the US behaved more like an emerging market, rather than the home of the world’s dominant stock index, definitive risk-free asset, and reserve currency. The only port in the storm was gold, which continued to break through record highs.

It seemed, at least for a moment, that the long, sunny era of US stockmarket dominance might be drawing to a close.

But after that early April chaos, equities staged a rapid late-month rebound. Trump had his Liz Truss moment, and in the face of a bond market rout, blinked. Reciprocal tariffs were paused for everyone but China. Trade negotiations appeared to be underway with choice partners, statements from Treasury Secretary Scott Bessent hinted at tariff de-escalations, and sentiment lifted. Surprisingly, April now looks like a blip on a long upward trend for the S&P 500, as opposed to a complete washout. More shockingly, the Nasdaq composite, a tech-heavy index of US shares, was marginally up for the month.

The result is a conflict between prices and fundamentals.

Prices look much as they did in March. For all of April’s turmoil, the S&P 500 is down just 2% from “Liberation Day”. 10-year Treasury yields are at their late March levels. Only the dollar has not recovered, perhaps the biggest dent in the American Exceptionalism story.

As a result, US equities still trade at a 30% premium to international markets—priced at around 20 times expected earnings versus 15 times for their international peers. That’s if you believe consensus earnings expectations, which have barely budged. Estimates for US earnings this year fell just 1% in April.

In our view, that looks like wishful thinking, because the fundamentals have changed. Even if Trump relents on tariffs, the economic environment has already become more challenging. Confidence is plummeting among consumers and businesses, while both worry about inflation and uncertainty. Whereas predicting the policy path is a fool’s game, we do not need to predict that uncertainty is high—it just is. That isn’t going away soon, and uncertainty has its own effects.

Uncertainty is bad for business. It drives consumers to save rather than spend, and it drives businesses to bolster finances rather than build factories. Reports that the number of cargo ships arriving in the US from China is set to plummet suggest empty shelves could be on the horizon for the US consumer, alongside a nasty inflation shock. Fundamentals appear to be deteriorating meaningfully, but prices have not yet followed to the same extent.

In response, investors typically grow more cautious. With less confidence in fundamental outcomes, investors need more compensation for taking risk, so they are willing to pay less today for the promise of tomorrow’s profits. This seems to be the mindset of professionals, but a rush of money into speculative assets suggests that retail investors are still bullish.

Back in January, we wrote that US stockmarket returns had become overly reliant on “great expectations”. Despite all that has transpired since then, it appears that markets still cling to the belief in American exceptionalism. The expectation that US companies can continue to deliver strong earnings growth, in an environment marked by rising geopolitical risks, unpredictable policy, and weakening global demand, seems increasingly tenuous.

Happily, the Orbis Funds are much less vulnerable. We prefer to invest in companies where expectations and valuations are both lower, leaving us much less exposed to adverse shocks. And for those Funds that have the US as part of their investment universe, they are meaningfully underweight. Companies outside the United States may find themselves in a much better environment. Starting valuations are cheaper, their governments can stimulate, and their central banks can cut interest rates. This positioning has been rewarded in recent months as the Funds have held up well amid market volatility.

Financial advisers can contact their local Business Development Manager to learn more about the Orbis funds.

This insight has been designed for institutional/professional investors or professional advisers. It is not suitable for a direct retail audience.

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