Viewed through this frame, U.S. exceptionalism appears alive and well. We dig a little deeper into the quarter’s results to uncover three areas that we believe look particularly well positioned for continued positive momentum.
1. U.S. bank brilliance
Financials knocked the lights out this quarter, posting the best EPS growth among sectors at 57% and eclipsing even the Mag 7. Earnings momentum in the next 12 months, as measured by aggregate analyst forecasts, has financials at the top among all sectors.
The exceptionalism is most evident in U.S. banks, an area favored by our global financials team. Earnings momentum is particularly strong here. With net interest margins now likely to have bottomed, comps for U.S. bank earnings should get easier going forward.
Other tailwinds: an outlook for more favorable regulatory and M&A regimes; stabilization in credit delinquencies, an area we have been watching amid signs of consumer stress; and a healthy employment backdrop in the sector.
As Fed inflation vigilance dims the outlook for significant interest rate cuts in 2025, a higher-for-longer rate environment means better margins on banks’ loan portfolios ― good news amid signs of life in lending, decent credit quality and a broader outlook for continued economic growth. The good news for investors: Large-cap U.S. bank stocks are “on sale,” trading at a meaningful discount to the broader S&P 500 Index.
Overall, financials represent the largest proportion of the value stock universe. We believe value stocks could be well positioned versus growth in a sustained higher-rate environment, as higher rates make current earnings (upon which value stocks are priced) more valuable than potential future earnings (upon which growth stocks are priced). For more on investing in value, see my colleague Tony Despirito’s piece Value stocks: Why you might be underweight and unaware.
2. AI-powered magnificence
Notwithstanding our like of value stocks, Q4 earnings of the market’s leading growth stocks, the Mag 7, still make them very easy to love.
Several of these names reported earnings on the heels of news that a Chinese AI start-up (DeepSeek) had built an AI model with the capabilities of the best U.S. counterpart, reportedly spending less than $6 million to train the model compared to the hundreds of billions spent by U.S. tech giants. The market reeled on concerns that the massive capex spending by the four big U.S. hyperscalers to advance AI progress was an overshoot with little hope for equally impressive return.
What did their earnings announcements reveal? Continued confidence in the spend. The foursome announced aggregate capex spending of over $330 billion for 2025, an increase of roughly 40% from 2024. Despite posting good earnings, the stocks were not broadly rewarded, as investors presumably are not as confident about the big spend manifesting into big return.
Still, it seems clear that U.S. exceptionalism, a term coined in 1840, is today being driven by this handful of four to seven stocks. Looking back, U.S. exceptionalism was long powered, at least in part, by the larger amount of free cash flow that U.S. companies have invested back into their businesses (case in point above), alongside a regulatory regime that allowed them greater flexibility to manage their businesses relative to global peers.
That continues today, though the price investors are paying for the “most exceptional” is historically high at a price-to-earnings (PE) ratio of nearly 30x for the Mag 7 as of Feb. 13. That’s lower than they were in 2020 and 2021 and may well be fair given the untold earnings potential. Yet the other 493 have a PE of 20x, meaning there are still many good U.S. large-cap stocks available at reasonable prices. And with the earnings of international counterparts not too far behind the U.S., their lower valuations make them worth a look as well. In both cases, stock selection is key.
3. Industrial power
Exceptionalism was also evident in the industrials sector, particularly among “thematic industrials,” in which we would bucket data center and AI capex-exposed companies. Earnings growth was robust in Q4 with an outlook for continued positive momentum (fed in large part by the big spending intentions noted above). We saw this in the likes of companies that supply into data center infrastructure development. A major provider of climate control products posted record earnings (more than 50% yoy) and in the fall launched a new business to support data center cooling. A competitor saw double-digit growth in revenue, net income and earnings in the quarter.
Meanwhile, “cyclical industrials” ― those tied to industrial production such as transportation, distributors and multi-industrials ― have yet to realize their full potential. We see prospects for a turnaround against low expectations, particularly as the ISM survey of U.S. manufacturing executives just topped 50 in January for the first time in 25 months, the critical line between expansion and contraction of manufacturing activity.
Bottom line
Overall, U.S. companies delivered an earnings season worthy of the “exceptionalism” label, with a positive outlook for the remainder of the year. That should bode well for equity price performance, although policy uncertainty or moments like “DeepSeek” could bring bouts of volatility. This emphasizes the importance of rigorous fundamental research to understand each company’s underlying strength and to guide investment decision-making and conviction in the face of broader market gyrations.
