There’s no denying that U.S. stocks have been on fire lately. Over the past year, the S&P 500 index has returned an impressive 28%, dwarfing the gains of other major global indexes. While the pan-European Stoxx Europe 600 and Canada’s S&P/TSX Composite managed to eke out modest gains of 8% and 6% respectively, the U.K.’s FTSE 100 is down 1% and China’s Shanghai Composite has taken a hefty hit of 10%.
Interestingly, only Tokyo’s Nikkei 225 has managed to keep pace with the S&P 500, thanks to its unique circumstances. With the Bank of Japan keeping its target interest rate below zero and the yen losing ground against the U.S. dollar, the Nikkei has gained significant ground. However, it’s worth noting that even with this success, the index still sits nearly 2% below its all-time high, set a staggering 34 years ago. In stark contrast, U.S. stocks have continuously hit record highs.
Given this stellar performance, it’s no surprise that some experts are speculating about an imminent end to American exceptionalism. They point to the fact that the current price-to-earnings ratio of the S&P 500 stands at 21 times expected earnings in 2024, compared to 20 times for the Nikkei, 13 for the Stoxx 600, and 11 for the FTSE 100. However, upon closer examination, it becomes clear that international stocks may not be as attractively priced as they appear.
The valuation disparity between different regions can largely be attributed to the composition of their respective indexes and the types of companies traded on each exchange. The S&P 500, for example, is heavily weighted towards growth stocks, with around 37% of its market capitalization coming from the technology sector. Additionally, a handful of highly valued mega-cap companies dominate the index.
Conversely, the Nikkei has a slightly lower allocation of 28% to the technology sector, which has seen significant outperformance recently, resulting in higher valuations.
In contrast, the Stoxx 600 places greater emphasis on financials as the top sector, comprising 19% of its market value. Healthcare and industrials follow closely behind at 14% and 13% respectively. Similarly, the FTSE 100 also exhibits a higher concentration in financials at 17%, while tech only represents a mere 6%. These differences highlight the greater value and exposure to economically sensitive industries found outside of the U.S., which helps explain the divergence in valuations.
In conclusion, while U.S. stocks have undeniably been the shining star of the investment world, it is important to consider the underlying factors that drive their performance. The unique composition of the S&P 500 and its heavy tilt towards growth stocks have propelled its record-breaking run. International markets, on the other hand, offer different opportunities and a more diversified exposure to various sectors. So, while the grass may seem greener on the other side, it’s crucial to carefully evaluate and consider all relevant factors before making investment decisions.
U.S. Stocks Poised for Continued Supremacy Over Global Peers
The U.S. stock market is expected to maintain its dominant position over other developed markets in the near future. The reasons behind this continued outperformance are multi-fold and worth considering.
Growth Emphasis Sets the U.S. Apart
One key advantage that the U.S. stock market enjoys is its focus on growth-oriented companies, a trend that is currently in vogue. As long as this emphasis remains intact, the U.S. stock market is poised to outperform other markets.
Quality Growth vs. Cyclical Value
Marko Kolanovic, J.P. Morgan’s chief market strategist, affirms the superiority of U.S. stocks over the euro zone. He believes that as long as the market remains narrow, concentrated, and driven by technology companies, the U.S. will maintain its upper hand. Kolanovic’s preference for quality growth over cyclical value further solidifies his continued preference for the U.S. market over the euro zone.
Strong U.S. Economy Bolsters Performance
Another factor contributing to the continued outperformance of U.S. stocks is the robustness of the American economy. Sustained economic strength in the U.S., with a GDP growth rate of 2.5% in 2023, makes sectors such as financials and industrials more likely to thrive. In contrast, Japan and the U.K. experienced recessionary periods during the second half of 2023, with both economies contracting for two consecutive quarters. Additionally, the euro zone managed only minimal growth of 0.1% last year.
Diverging Central Bank Actions
While discussions in the U.S. revolve around the Federal Reserve potentially maintaining higher interest rates for an extended period, central banks in Europe and the U.K. seem poised for more near-term rate cuts due to stumbling economies and lower inflation. This discrepancy in central bank actions further supports the argument for continued outperformance by U.S. companies and justifies their higher valuations.
In conclusion, the U.S. stock market is well-positioned to maintain its supremacy over other global peers. Both its growth-oriented nature and the strength of the American economy contribute to this advantage. As divergent central bank actions unfold, U.S. stocks are expected to retain their fundamental outperformance, which promises to benefit investors who choose to focus on the U.S. market.