In the world of investing and financial analysis, there’s a common cognitive bias that often skews our judgment: the tendency to assume that anything performing significantly above average will eventually regress to a lower number. This assumption, often referred to as the regression fallacy or mean reversion bias, leads us to believe that trends will naturally “balance out” over time, even when there’s no evidence to support such a regression.
A great example of this is the disparity between the cash flow growth of U.S. corporations and international corporations. Over the past 16 years, U.S. companies have grown their cash flows by 140%1, while international companies have remained relatively flat. Many might look at this disparity and conclude that the gap “needs” to narrow at some point, assuming a natural convergence. But does it?
Why the Gap Doesn’t Necessarily Need to Close
This assumption of mean reversion often overlooks key fundamentals and structural factors. U.S. corporations have benefited from a combination of innovation ecosystems, favorable regulatory environments, access to abundant capital, and competitive dynamics that drive sustained growth. These advantages aren’t random anomalies; they are deeply rooted in the structure of the U.S. economy.
Instead of assuming the gap will close, we need to ask the right questions:
- Are the structural advantages that have driven U.S. cash flow growth weakening?
- Are there signs of acceleration in international markets that could close the gap?
- Is the growth disparity sustainable, or could it even widen further?
While mean reversion might apply in some random or cyclical events, trends driven by strong fundamentals don’t necessarily need to regress.
Why the Growth Differential Could Persist—or Even Widen
It wouldn’t surprise me if, over the next 16 years, the growth differential between U.S. and international free cash flow remains the same—or even increases. The trends we’ve observed are rooted in structural advantages that show no signs of weakening. In fact, as the global economy evolves, these advantages could become even more pronounced, further driving the disparity.
Breaking Free From Intuition
This is a reminder of the importance of relying on data and fundamentals rather than intuition when evaluating long-term trends. While the idea of mean reversion may feel intuitive, it’s not always supported by the evidence. By challenging this bias, we can better analyze growth opportunities, particularly in global markets, without being constrained by unfounded assumptions.
As investors and analysts, it’s our job to evaluate trends critically and to focus on what the data and underlying factors are telling us—not what we assume should happen based on preconceived notions.2
What do you think? Are we overlooking the sustainability of U.S. corporate growth, or is there room for international corporations to catch up? Let’s discuss.
If you found this perspective helpful, stay tuned for more insights on market trends and strategic investing.
1 Bates, Thomas, et al. WHY DO U.S. FIRMS HOLD SO MUCH MORE CASH THAN THEY USED TO?, Sept. 2006, chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/www.nber.org/system/files/working_papers/w12534/w12534.pdf.
2 Zabrowski, Ryan. Time Ahead: Investor’s Guide to Prosperity and Impact. First Edition Design Publishing, 2024.
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