It’s a well-known fact that when it comes to investing, there’s truly no place like home. U.S. stocks have been on an incredible run, outperforming their international counterparts by a wide margin. Over the past year alone, the S&P 500 index has delivered a remarkable return of 28%. In stark contrast, the pan-European Stoxx Europe 600 managed a modest gain of 8%, while Canada’s S&P/TSX Composite saw a mere 6% return. The U.K.’s FTSE 100 actually experienced a decline of 1%, and China’s Shanghai Composite suffered a hefty loss of 10%.
The sole exception to this trend is Japan’s Nikkei 225, which has managed to outpace the S&P 500 over the past year. The Bank of Japan’s strategic decision to maintain interest rates below zero and the weakening of the yen against the U.S. dollar helped propel the Nikkei to this achievement. However, despite this accomplishment, the index still lags behind its all-time high, which was established a staggering 34 years ago. In stark contrast, U.S. stocks continue to break record after record.
Given this impressive performance, it is hardly surprising that many experts are sounding the alarm bells about the demise of American exceptionalism. After all, the current price-to-earnings ratio for the S&P 500 stands at 21 times the anticipated earnings for 2024, surpassing the ratios of other major indexes like the Nikkei (20 times), Stoxx 600 (13 times), and FTSE 100 (11 times). However, when we delve deeper into the matter, it becomes evident that international stocks may not be as attractively priced as they initially seem.
The discrepancy in valuations and recent returns can be attributed in large part to the types of companies listed on each exchange and the composition of the respective indexes. The S&P 500, for instance, is heavily weighted towards growth stocks, with the technology sector accounting for an impressive 37% of its market capitalization. Additionally, a handful of highly valued mega-cap companies dominate the top of the index.
In comparison, the Nikkei boasts a smaller tech sector, representing 28% of its market value. However, this sector has recently outperformed, resulting in comparatively higher valuations.
Meanwhile, the Stoxx 600’s largest sector is financials, making up 19% of its total market value. Healthcare follows closely behind at 14%, with industrials rounding out the top three at 13%. The FTSE 100 mirrors this composition to a large extent, with 17% allocated to financials and a mere 6% to technology. This discrepancy provides investors with significantly more exposure to value-oriented and economically sensitive sectors compared to their U.S. counterparts, thereby contributing to the disparity in valuations.
In conclusion, while U.S. stocks have undeniably reigned supreme in recent times, it is crucial to consider the underlying factors driving their performance as well as the composition of international markets. As an investor, it is essential to take a closer look at these nuances in order to make informed decisions and fully grasp the true value and potential offered by each investment opportunity.
The Case for Continued Supremacy of U.S. Stocks
The setup seems to favor U.S. stocks over their developed-market peers, and there are a few key reasons behind this trend. Firstly, the S&P 500 stands out with its growth emphasis, a characteristic that sets it apart from others. As long as this dynamic remains unchanged, the index is expected to continue outperforming.
Marko Kolanovic, J.P. Morgan’s chief market strategist, explains that as long as the market remains narrow, heavily concentrated, and tech-driven, the United States is likely to maintain an upper hand compared to the euro zone. The preference for Quality Growth over Cyclical Value leads to an ongoing preference for U.S. stocks over their European counterparts.
However, even if investor preferences shift, the U.S. market is still expected to outperform. This is primarily due to the fact that sectors such as financials and industrials rely on a strong economy to thrive, and the U.S. boasts the healthiest growth among major economies. In 2023, the gross domestic product of the U.S. expanded at a rate of 2.5%, while Japan and the U.K. both experienced recessions. The euro zone, on the other hand, only managed to achieve a meager 0.1% growth last year.
While the conversation in the U.S. revolves around the Federal Reserve’s decision to maintain higher interest rates for a longer period, stumbling economies and lower inflation in Europe and the U.K. suggest that central banks in those regions will continue with near-term rate cuts. This divergent economic landscape serves as an argument for the sustained outperformance of U.S. companies and supports higher valuations.
In conclusion, considering these factors, it seems wise to stay close to home and invest in U.S. stocks.
