U.S. equities maintained their global lead in early 2019, with the S&P 500 rising 11% year-to-date, but analysts note growing opportunities in other markets amid evolving economic dynamics.
Despite U.S. stocks nearing 70-year highs relative to developed markets, factors like slowing domestic profit growth—following a 24.4% surge in 2018—and improving conditions in China and Europe are creating potential for market rebalancing, according to investors.
Manulife Asset Management's Nathan Thooft acknowledged the long-standing trend of U.S. outperformance but cautioned, "The reality is, though, it can’t go on forever." The S&P 500's 16.4 price-to-earnings ratio contrasts with 13.4 for Europe's STOXX and 11.5 for emerging markets, raising questions about valuation sustainability.
"People are willing to pay a very hefty premium for the U.S. stock market," said USAA Asset Management's Lance Humphrey, noting that "the fundamentals in the U.S. don’t necessarily justify the degree of that premium." This valuation gap has made emerging markets an attractive option, despite their status as the "most crowded trade" in a BAML survey.
The U.S. dollar's strength remains a key factor, impacting emerging market debt and currency translation costs for international investments. However, a potential decline in the dollar's value could benefit non-U.S. markets, particularly if trade tensions between the U.S. and China ease.
China's Shanghai Composite surged 22% in 2019, outpacing both U.S. and global indices, while Europe's STOXX gained 10%. Morgan Stanley's Lisa Shalett argued that European equities could surpass U.S. performance, citing achievable economic growth forecasts. Meanwhile, SunTrust's Keith Lerner noted that "no one has expectations" for Europe, suggesting potential for positive surprises.
Market dynamics are also influenced by sector allocations, with U.S. indices heavily weighted toward technology (24% of MSCI U.S. index) compared to 6% in Europe. Analysts predict a potential shift toward financials and value stocks, which could benefit European markets.
Despite these factors, some investors remain cautious about diversifying beyond U.S. markets. "There is no doubt that U.S. assets are over-owned," said Manulife's Thooft, highlighting the complex interplay of global economic forces shaping investment decisions.
