Exceptional conditions rarely persist indefinitely, but this broad-based conviction in prolonged US exceptionalism has investing asking: How long can it last and how can contrarian investors prepare for mean reversion?
Nick Clay, Portfolio Manager, Redwheel, believes it is now starting to fade. "Assuming mean reversion of excesses still holds true: reversion in excessive valuations, excessive concentration, and fiscal largess. Then we believe there is a need to refocus away from a "markets always go up" narrative," he says.
A more realistic outlook is one of increased volatility, most likely a return of inflation, a broadening away from the US, and most importantly, away from an obsession with capital returns alone driving their total return.
History shows that excesses—whether in valuation, concentration, or fiscal conditions—eventually correct. This is a case for a disciplined approach to total return investing.
"Discipline will be required on valuations and on downside capture rather than upside. As we anticipate the compounding of a dividend, it becomes, once again, the dominant driver of one's total return over the next 10 years," says Nick.
1, 2 Source: Bloomberg, as at 1 June 2025
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