After 15 years of dominance, US equities may be on the verge of handing the baton to international markets, according to a new note from JP Morgan.
The bank suggests that some of the structural forces behind the outperformance of American stocks, especially tech, are beginning to lose momentum, while Europe and emerging markets are showing early signs of a more durable recovery.
Since 2010, US stocks have dramatically outpaced the rest of the world, helped by the rise of the so-called Magnificent Seven, a strong US dollar and relatively stronger economic growth.
Inflexion point?
But JP Morgan argues that all three of these trends may now be at or near inflexion points.
First, the Magnificent Seven accounted for more than 40% of US outperformance, yet the bank believes their edge may narrow as AI capabilities spread and growth becomes more broadly shared.
US tech is no longer immune to economic cycles, with many of its biggest names heavily exposed to consumer spending and advertising, both of which are cyclical.
Second, the US dollar has acted as a haven for most of the past decade, but that pattern may not hold. A weaker dollar would tend to favour international assets, particularly in emerging markets.
Caution
JP Morgan cautions that the US may no longer have the same macro cushion it once did, as fiscal deficits widen and relative growth in other regions catches up.
Meanwhile, some of the key headwinds weighing on European equities may be easing. China, Europe’s largest export partner, appears to be stabilising.
Germany’s fiscal constraints, long seen as a brake on spending, may be loosening. And energy security risks sparked by the Russia-Ukraine war have faded slightly as European supply chains adapt.
End of the boom times?
JP Morgan points out that at the start of the US equity boom, American stocks traded on similar price-to-earnings multiples as global peers.
Today, they carry a 43% premium. The US now represents more than 70% of global equity market capitalisation, up from less than 50% in 2010.
The bank concludes that international markets may offer a more attractive risk-reward profile from here. In its view, global equities no longer look like a high-beta trade in periods of market stress but could deliver in an environment of improving sentiment.