America First? Not When It Comes to the Stock Market.

The US stock market has been on a tear, with the S&P 500 Index returning 108.4% over the last five years, compared to just 29.9% from the MSCI ACWI ex-US index. But is this dominance sustainable, and should investors continue to pile into US equities? Let's explore the factors contributing to US market leadership and assess the potential for continued outperformance.



US Market Leadership: A Reward for Consistent Success

The US market's dominance can be attributed to several factors, including superior and sustained earnings growth, technological innovation, access to capital, and a global earnings footprint. Over the last decade, US corporate earnings in USD terms have grown by around 9% on an annualised basis, compared to 2-3% in Europe and around 1% in emerging markets (EMs). This sustained earnings growth has led to a marked increase in US stocks' weightings in global indices, with US stocks now making up around 74% of the MSCI World Index.



Technology: America First

The US is home to many of the world's most successful tech companies, such as Amazon, Apple, and Nvidia, which have been leaders in innovation and delivered attractive returns for investors. The combined weighting of the IT and Communication Services sectors amounts to just over 40% of the S&P 500 Index. This tech-centric focus has been a major factor in US equity leadership.

R&D-led Innovation and Access to Capital

The US's world-leading innovation-focused universities attract talent from within the US and abroad, and US businesses tap into this resource. North American companies account for circa 30% of global research and development (R&D) spending, far outstripping that of European counterparts. Additionally, the US has by far the deepest and most liquid capital markets, providing companies at all stages of their development with access to funds to foster growth and/or enhance their stability.

Global Earnings Footprint

Owning US-listed shares gives investors exposure to a truly global earnings footprint. S&P Dow Jones estimates that on average, constituents of the S&P 500 Index generate around 40% of their revenues from outside the US, and for the Magnificent Seven stocks specifically, the figure rises to nearly 50%. This global exposure helps to mitigate risks associated with domestic economic cycles and provides access to growth opportunities in emerging markets.



Market-friendly, Pro-business Environment, and a Robust Economic Backdrop

The US's 'afe haven' appeal is partly founded on the record of nimble policy responses. Regulators and central bankers in the US have been more responsive during crises than in other regions, and the US has a robust economic backdrop. While Europe-based investors are ready and willing to diversify globally, US retail investors have been more minded to invest domestically. However, investors need to be vigilant over political factors and trade risks, as seen in the recent selloff in some US pharma stocks following President-elect Trump's appointment of JFK Jnr.

The Future of US Market Leadership

While US market leadership has been a function of superior and sustained earnings growth, investors should be mindful of potential headwinds. The US market's high valuation, sector concentration, and changing market dynamics could pose challenges to continued outperformance. Additionally, the growing influence of emerging markets and the potential for a rebalancing of economic power could lead to a more diversified global equity landscape.



In conclusion, the US market's dominance in global equity indices is a reward for consistent success, driven by factors such as technological innovation, access to capital, and a global earnings footprint. However, investors should remain vigilant and consider diversifying their portfolios to capture global stock market opportunities in an era of increased US megacap dominance. By doing so, investors can better position themselves to navigate potential challenges and capitalize on the long-term growth prospects of the global equity market.