What are the key takeaways from this The Meb Faber Show episode?

Key insights include: **Valuation vs Growth Attribution:** Post-GFC US equity outperformance came primarily from valuation expansion (CAPE rising from average to 40x) rather than earnings growth, with richening contributing more than the actual 1% historical US earnings growth advantage over international markets. This pattern typically reverses over subsequent decades.; **US Relative Valuation Extreme:** US CAPE ratio now trades at 1.8x non-US developed markets, near the December 2021 peak of 2.0x. Historical data shows this ratio has 85% predictive power (r-squared) for ten-year forward returns when measured from 1985 onward, suggesting significant mean reversion risk ahead.; **Objective vs Subjective Expectations:** Yield-based objective measures show 0.5 positive correlation with future returns, while rear-view-mirror subjective expectations (analyst forecasts, retail sentiment) show negative 0.3 correlation. Institutions follow objective models on paper but often deviate in practice, staying overweight US despite low expected returns.

What did Antti Ilmanen discuss on The Meb Faber Show?

Antti Ilmanen from AQR examines US market valuations at 40x CAPE ratio, contrasts objective yield-based forecasts with subjective rear-view-mirror expectations, and explains why current US equity premiums appear unsustainably thin for the decade ahead. Key topics include: **Valuation vs Growth Attribution:** Post-GFC US equity outperformance came primarily from valuation expansion (CAPE rising from average to 40x) rather than earnings growth, with richening contributing more than the actual 1% historical US earnings growth advantage over international markets. This pattern typically reverses over subsequent decades.; **US Relative Valuation Extreme:** US CAPE ratio now trades at 1.8x non-US developed markets, near the December 2021 peak of 2.0x. Historical data shows this ratio has 85% predictive power (r-squared) for ten-year forward returns when measured from 1985 onward, suggesting significant mean reversion risk ahead..

How long is this episode of The Meb Faber Show?

This episode is 63 minutes long. SignalCast provides an AI-generated summary so you can get the key insights in about 3 minutes.

The Meb Faber Show

AQR’s Antti Ilmanen – US Exceptionalism: Growth Story or Valuation Trap? | #607

November 21, 2025

63 min episode · 2 min read

Antti Ilmanen

Episode

63 min

Read time

2 min

Topics

Productivity, Investing, Fundraising & VC

AI-Generated Summary

Published Dec 30, 2025

Key Takeaways

✓Valuation vs Growth Attribution: Post-GFC US equity outperformance came primarily from valuation expansion (CAPE rising from average to 40x) rather than earnings growth, with richening contributing more than the actual 1% historical US earnings growth advantage over international markets. This pattern typically reverses over subsequent decades.
✓US Relative Valuation Extreme: US CAPE ratio now trades at 1.8x non-US developed markets, near the December 2021 peak of 2.0x. Historical data shows this ratio has 85% predictive power (r-squared) for ten-year forward returns when measured from 1985 onward, suggesting significant mean reversion risk ahead.
✓Objective vs Subjective Expectations: Yield-based objective measures show 0.5 positive correlation with future returns, while rear-view-mirror subjective expectations (analyst forecasts, retail sentiment) show negative 0.3 correlation. Institutions follow objective models on paper but often deviate in practice, staying overweight US despite low expected returns.
✓Bond vs Equity Investor Psychology: Bond investors demonstrate contrarian mean-reversion behavior because they quote forward-looking yields, while equity investors extrapolate past performance because they focus on backward-looking prices and returns. This fundamental difference in framing drives opposite forecasting patterns across asset classes.
✓Diversifier Implementation Strategy: Portable alpha and return-stacking approaches that combine equity beta exposure through derivatives with diversifying strategies (trend-following, multi-factor) prove more durable than standalone diversifiers. This structure prevents investors from abandoning diversifiers during extended equity bull markets when line-item comparison looks unfavorable.

What It Covers

Antti Ilmanen from AQR examines US market valuations at 40x CAPE ratio, contrasts objective yield-based forecasts with subjective rear-view-mirror expectations, and explains why current US equity premiums appear unsustainably thin for the decade ahead.

Key Questions Answered

•Valuation vs Growth Attribution: Post-GFC US equity outperformance came primarily from valuation expansion (CAPE rising from average to 40x) rather than earnings growth, with richening contributing more than the actual 1% historical US earnings growth advantage over international markets. This pattern typically reverses over subsequent decades.
•US Relative Valuation Extreme: US CAPE ratio now trades at 1.8x non-US developed markets, near the December 2021 peak of 2.0x. Historical data shows this ratio has 85% predictive power (r-squared) for ten-year forward returns when measured from 1985 onward, suggesting significant mean reversion risk ahead.
•Objective vs Subjective Expectations: Yield-based objective measures show 0.5 positive correlation with future returns, while rear-view-mirror subjective expectations (analyst forecasts, retail sentiment) show negative 0.3 correlation. Institutions follow objective models on paper but often deviate in practice, staying overweight US despite low expected returns.
•Bond vs Equity Investor Psychology: Bond investors demonstrate contrarian mean-reversion behavior because they quote forward-looking yields, while equity investors extrapolate past performance because they focus on backward-looking prices and returns. This fundamental difference in framing drives opposite forecasting patterns across asset classes.
•Diversifier Implementation Strategy: Portable alpha and return-stacking approaches that combine equity beta exposure through derivatives with diversifying strategies (trend-following, multi-factor) prove more durable than standalone diversifiers. This structure prevents investors from abandoning diversifiers during extended equity bull markets when line-item comparison looks unfavorable.

Notable Moment

Ilmanen reveals he stayed entirely out of equities throughout the 1990s bull market due to high valuations, missing substantial gains. His office mate later challenged whether he believed more in his timing models than in the equity premium itself, fundamentally reshaping his approach to position sizing.

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Episode Transcript

Welcome to the Meb Faber show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here. Matt Faber is the cofounder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria's funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com. Today's show is sponsored by Cambria. Do you hold legacy investment positions with significant gains? What if you could transition into an ETF without facing a large tax bill? You can with the three fifty one ETF exchange. Here's how it works. Investors contribute stocks or other securities to a newly formed ETF in exchange for ETF shares. As long as the special rules and diversification requirements are met, the investor is essentially able to seed the launch of the ETF without an immediate taxable event. Because ETFs typically don't distribute any capital gains, investors don't face taxes until they sell their ETF shares, allowing for better control over the timing of the tax event. Are you ready to explore a three fifty one ETF exchange? Visit cambriafunds.com forward slash three fifty one to take the next step in innovative, tax savvy investing with Cambria today. Cambria Investment Management l p, Cambria is a registered investment adviser. Information set forth herein is for informational purposes only. It does not constitute financial investment, tax, or legal advice. Past performance does not guarantee future results. All investments are subject to risk, including the risk of loss of principal. Welcome back, everybody. Today, we have one of my all time favorite guests back on the show. We're joined by Antti Ullmanen, global co head of the portfolio solutions group at AQR. Capital management in this role, he managed the team responsible for advising institutional investors, sovereign wealth funds. That means big money, y'all. Develops the firm's broad investing ideas. He has a new series of papers this year. I'd like to call it a book almost. They're almost expect about expected returns. We're gonna cover them all today. Antti, welcome back to the show. Thanks. Great to be back, Meb. And, Antti, it may even convert into a book next year. There's some talk with CFA Institute. Yeah. Well, I wanted to ask you a question. You know, when you join AQR, is the first week do they say, look. Here's the deal. We gotta make sure you do a class in footnotes because the AQR papers always have the best footnotes. And I actually tweeted one last night that there was a quote that you put in near the end of the first paper. And I'm gonna read it listeners because it was so good. You can tell me why you …

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