U.S. Stocks Are Breaking Records. The Rest of the World Is Doing Better.
It’s a narrative that feels almost contradictory: the S&P 500 is regularly hitting new all-time highs, yet a quieter, more significant story is unfolding beyond American shores. While headlines trumpet the astonishing run of U.S. mega-cap tech, a key benchmark for international equities is on pace to outperform the S&P 500 by the widest margin since 2009. This isn't just a minor blip; it's a profound shift that's catching the attention of seasoned investors and challenging long-held assumptions about market leadership.
Indeed, for many U.S. investors, the past decade has cemented a strong home bias. The domestic market, fueled by innovation and a robust economy, has delivered stellar returns, often leaving international allocations in the dust. But 2024 is shaping up to be different. The MSCI ACWI ex USA Index, which tracks developed and emerging markets outside the U.S., has been quietly, yet consistently, outpacing its American counterpart. This divergence underscores a crucial, often overlooked, dynamic in global financial markets: diversification still matters, and sometimes, the best opportunities lie where the spotlight shines brightest.
So, what's driving this newfound strength in international markets? Several factors are at play. Chief among them are valuations. For years, non-U.S. equities have traded at a significant discount to their American peers. While the S&P 500's ascent has been largely powered by a handful of high-growth technology behemoths, pushing their price-to-earnings ratios to elevated levels, many companies in Europe, Japan, and emerging markets have remained attractively priced. Investors are now rediscovering the value proposition these markets offer, particularly as global economic growth shows signs of broadening.
Moreover, the sector composition of international indices often differs markedly from the S&P 500. While the U.S. market is heavily weighted towards technology and growth stocks, international benchmarks tend to have greater exposure to "old economy" sectors like financials, industrials, and materials. These sectors are benefiting from a more cyclical rebound, resilient global demand, and, in some cases, the tailwinds of inflation and higher commodity prices. For instance, European banks, long out of favor, have seen a resurgence as interest rates have risen, improving their net interest margins. Similarly, Japan's market has been on a tear, driven by corporate governance reforms and a weakening yen that boosts exporter profits.
Another critical element is the shifting landscape of global monetary policy. While the Federal Reserve has been hinting at rate cuts, other central banks are navigating their own unique economic cycles. Different interest rate expectations can influence currency movements, which, in turn, impact returns for U.S. dollar-denominated investors. A weaker dollar, for example, can enhance the returns of international assets when converted back to greenbacks.
"It's a classic case of mean reversion," noted one portfolio manager, who asked not to be named due to compliance restrictions. "U.S. outperformance was exceptional for over a decade. Now, you're seeing capital flow into areas that offer better relative value and are playing catch-up. This isn't just about the 'Magnificent Seven' anymore; it's about the broader global economy."
For investors, this trend carries significant implications. Those with a heavy U.S. equity bias might be missing out on substantial gains. It underscores the enduring importance of a well-diversified portfolio that includes a strategic allocation to international markets. While the S&P 500's record-breaking run remains impressive, the quiet outperformance of global equities reminds us that the investment world extends far beyond our borders, offering opportunities that are, for the moment, simply doing better.
