The reasons for the US equity market going solo
In a performance comparison of the global equity markets in 2023, the USA once again finished well ahead of Europe and emerging markets. The increasing decoupling of the US equity market from the rest of the world thus continues. What are the reasons for this development and what conclusions can be drawn from it for investment strategy?
Equity markets (global)
Performance of the equity indices last year (USA: S&P500, 25.9 % - Europe: STOXX Europe 600, 15.5 % - emerging markets: MSCI EM, 9.0 %) confirmed this long-term trend. Over the past ten years, the US equity market has increasingly decoupled itself from the markets in the rest of the world, with significantly better returns compared to Europe and emerging markets.
Source: Refinitiv Datastream, Colin&Cie
Public debt (global)
One reason for this positive sentiment on the US stock market is the favourable economic environment with a historically low unemployment rate. This situation is largely based on extensive fiscal policy support measures, which are much stronger in the USA - measured in terms of gross domestic product (GDP) – compared to Europe and emerging markets. Supporting the economy has its price. In the USA, it is leading to higher government budget deficits and a further increase in government debt to more than 120% of GDP. Public debt in Europe and the emerging markets is significantly lower at around 80% in each case.
Source: Refinitiv Datastream, Colin&Cie
Equity valuation (global)
Better performance of the US stock market is due to the stronger earnings performance of US companies compared to the rest of the world. However, the even stronger increase in share prices in the USA in relation to corporate profits leads to a higher and unattractive price/earnings ratio (valuation) of American shares (19.5). Compared to the valuation of shares in Europe (12.6) and the emerging markets (11.4), US shares are therefore expensive.
Source: Refinitiv Datastream, Colin&Cie
Market breadth (US equity market)
The above-average performance of the US equity market in recent years has been driven largely by the technology sector and the seven companies Apple, Amazon, Alphabet (Google), Microsoft, Meta Platforms (Facebook), Nvidia and Tesla (see chart on the performance of the US sectors). The "Glorious 7" group posted a positive performance of 71% in 2023. Their weighting in the S&P 500 share index, which comprises the largest listed companies in the US, is 25%. Without these seven technology stocks (S&P 493), the performance of the index would have been 6% and not 25.9% (S&P 500).
Source: Refinitiv Datastream, Colin&Cie
Equity valuation (US equity market)
Better performance of the US technology sector is due to stronger earnings performance of US technology companies compared to other sectors in the US stock market. This is the result of global growth in the areas of online retail, communication and electromobility as well as the growing enthusiasm for artificial intelligence worldwide. However, the even stronger rise in share prices in the US technology sector in relation to corporate profits is leading to a higher and unattractive price/earnings ratio (valuation) for US technology shares (27.9). Compared to the valuation of shares in other sectors, US technology shares are therefore expensive.
Source: Refinitiv Datastream, Colin&Cie
Summary and conclusions for the long-term investment strategy
The above-average performance of the US equity market in recent years is mainly due to the high profits of a small number of globally active technology companies. The current performance therefore does not broadly reflect the US equity market. The question arises as to how sustainable the eight-year outperformance of the "Glorious 7" technology companies will be. Both the concentration (bubble formation) in the US equity market with very high, unattractive valuation of the US technology sector and the massive increase in US government debt with the risk of national bankruptcy should therefore be a warning sign.
Technology stocks will continue to play an important role in Colin&Cie's asset management mandates. However, we do not expect the extremely positive performance of the major US technology stocks in 2023 to continue to the same extent. Due to the risks on the US equity market described above, we continue to focus on broad diversification by region and sector in our long-term investment strategy.
Disclaimer - legal notice
This publication was produced by the Investment Office of the Colin&Cie Group. The information and opinions contained in this document are based on sources we believe to be reliable. However, we cannot guarantee the reliability, completeness or correctness of these sources. All information and quoted rates are only up-to-date at the time of this publication and are subject to change at any time without notice. The content is based on numerous assumptions made by the Colin & Cie Group. It should be noted that different assumptions can lead to materially different results. The forecasts and assessments are only current at the time this publication is prepared and can change at any time without prior notice. Past performance of an investment is not a guarantee of future results. Certain investments can experience sudden and substantial losses in value. This information and views do not constitute a solicitation, offer or recommendation to buy or sell investment instruments or to carry out any other transactions. We recommend interested investors to consult their personal advisor before making decisions on the basis of this document so that personal investment goals, financial situation, individual needs and risk profile as well as further information can be duly taken into account as part of a comprehensive consultation. The information contained in this publication is marketing material that is distributed for advertising purposes only.
