When reflecting on the market outlook for 2024 and beyond, one major question remains US stocks, not only because of its high weight in global markets (around 60% of a market capitalization-weighted ETF), but also because of its historical performance. The analysis by starts from here Richard Flax, Chief Investment Officer at Moneyfarm who compares relative returns for US, Europe, UK and Emerging Markets ETFs underlines how “the outperformance of the former is evident and for the higher risk portfolios the choice of US equity exposure represented one of the main performance drivers”.
US shareholders, will the momentum continue?
There would be many perspectives – he explains – from which to analyze the performance of US stocks, including for example the performance of tech stocks, but on this occasion we will focus on two fundamental aspects: corporate profits and valuations. A graph compares US equity with a measure of corporate profits, highlighting how, over time, the aggregate value of companies grows as profits grow.
Tracing the same graph – the analysis continues – for the shares of emerging markets, we immediately notice that here the earnings picture was more mixed over time: in particular, in the last decade the growth in profits recorded in emerging markets has been slower than that of US companies. British companies performed better than expected in terms of earnings, despite a higher level of volatility during the pandemic period.
The brilliant performance of US stocks, however, “it is not only attributable to the strengthening of profits, aRelative valuation also played an important role. The following graph shows the trend of the forward price/earnings ratio for the United States, the United Kingdom and Europe ex-UK over the last decade (starting from February 2014)”.
First, “it is noted that after the Covid there has been a significant divergence between US, British and European stocks, with a revaluation of the former compared to the latter, on the wave of optimism towards the US technology sector (which represents a heavyweight in the index) and growth prospects generally more solid. Secondly, the de-rating of the United Kingdom appears notable, cheaper by around 20% compared to 2014.
So, the combination of sustained earnings growth and high valuations has helped propel US stocks ahead of them global peers in the last decade”.
How should we approach the future?
“US stock valuations have been at a high for a long time relatively tallerand compared to those of the rest of the developed markets, but it is difficult to determine when this will start to be a determining factor. At the same time, the earnings outlook is also likely to be better, despite being driven by a relatively small number of Big Tech. At the moment it seems likely that the earnings momentum is set to continue, but betting too aggressively against US stocks it has historically been a difficult game to play,” concludes the analyst.