It's been a great decade. It's been hard not to make money in U.S. stocks.

To lose money over the past ten years, you would have had to chase every bad idea that came down the pike, from SPACs and Crowdfunding to inverse QQQ funds.

If you were determined not to compound your cash at double-digit levels, you could have used covered call funds to cut your returns in half.

If you just owned the indexes or the large-cap, well-known companies, you made excellent returns.

But now, it looks like the party is coming to an end. All five of the world's most reliable long-term market indicators say the same thing: The party in U.S. stocks is over.

Here's why and where to invest instead.

As investors assess the road ahead after a long stretch of stellar U.S. equity performance, the key question is where the next decade's returns will come from. Using the most reliable long-term indicators—CAPE ratios, excess CAPE yields, market cap to GDP, and investor allocation levels—the message is straightforward: The U.S. is expensive. Japan and Europe look far more promising.

Before we get into the comparisons, here's a quick overview of the tools we're using:

• CAPE Ratio (Cyclically Adjusted P/E): Price divided by the 10-year average of inflation-adjusted earnings. A higher CAPE generally signals lower future returns.
• Excess CAPE Yield (ECY): The inverse of the CAPE ratio (earnings yield) minus the 10-year government bond yield. A higher ECY means stocks offer more yield relative to bonds—historically, a strong signal for forward equity returns.
• Market Cap to GDP: A broad valuation gauge comparing total equity market value to the size of the economy. Higher readings often suggest lower long-term returns.
• Investor Allocation to Equities: Measures the share of household wealth held in stocks. High equity exposure often signals crowded positioning and lower future returns.
• Tobin's Q: Market value of companies compared to the replacement cost of their assets. When Q is high, the market is expensive relative to its real-world capital base.

U.S. Stocks: Expensive And Well-Owned

Let's start with the U.S., where the CAPE ratio is north of 33, placing it in the top 5% of historical observations. The inverse CAPE yield is under 3%, while the 10-year Treasury yield sits around 4.45%. That gives us a negative excess CAPE yield of -1.6%—a red flag by historical standards. It means investors earn less from stocks than from safe government bonds when adjusted for valuation.

Market cap to GDP is pushing 175%, and household equity allocations are near all-time highs around 45%. In past cycles, these conditions have corresponded with real returns of just 1–2% per year, or 3–4% nominal, assuming 2% inflation. Investors expecting a repeat of the last decade's performance may be in for a disappointment.

Japan: Solid Valuations, Positive Yields, Room to Re-Rate

Japan offers one of the most attractive long-term setups in the developed world. The Topix CAPE is around 18, with an inverse CAPE yield of 5.3%. The 10-year JGB yield, still under 1%, puts the excess CAPE yield at a very strong 4.45%. That signals that Japanese equities offer far better return potential than domestic bonds.

Household equity allocations in Japan remain low—12% to 15%—and shareholder-friendly reforms continue to gain steam. With a dividend yield near 2.5% and improving capital efficiency, the models suggest real returns of 5–6%, with nominal returns around 6.5–7.5% annually. If capital flows accelerate, those numbers could improve.

Tobin's Q in Japan is close to 1.0, suggesting that market prices are in line with replacement costs. That's a neutral-to-positive valuation signal.

Europe: Reasonable Valuations, High Dividends, Undervalued Potential

Europe sits somewhere between the U.S. and Japan. The CAPE ratio is near 16.5, and earnings yields are strong at 6%. With sovereign yields averaging around 2.8%, the excess CAPE yield is a healthy 3.2%. That's historically consistent with mid-single-digit real returns.

Market cap to GDP across the region is around 85%, and equity allocations remain modest. The dividend yield stands at 3.4%, and valuations are well below U.S. levels. Tobin's Q is also in the 0.9 to 1.0 range—indicating fair to slightly undervalued conditions.

If the EU's capital markets integration efforts gain traction and political risks stay contained, forward nominal returns in the 6.5–7.5% range look reasonable.

The Bottom Line

The data speaks for itself. U.S. stocks are priced for low single-digit returns. Japan and Europe, on the other hand, offer valuation support, earnings power, and structural room to re-rate higher.

Investors who think globally and allocate accordingly may be rewarded not just with diversification but also with better absolute returns.

As always, valuation matters, and the case for going global is stronger than it has been in years.

While Markets Fell, ROOT Did This…

When most stocks struggled, ROOT followed a post-earnings pattern. Register for and watch this free masterclass to see how it works and which stocks might be next.

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