ORLANDO, Fla., Feb 7 (Reuters) – Years of outperformance in U.S. stocks are finally coming to a head and their share of the global pie should normalize from here.
The U.S. share of the multi-trillion-dollar global stock market remains high by historical standards, but is set to fall as massively inflated Big Tech valuations reset, the dollar retreats and other regions catch up alongside to a change in the leadership of the sector.
The stellar start to the year on Wall Street has been extraordinary – the best January for the Nasdaq since 2001. But it continues to lag many European and Asian benchmarks as, by many measures, US valuations remain both absolutely and relatively tense.
With investors already positioned this year to shift from US equities to battered Europe and China, even a return of US equities to their long-term average share of global market capitalization would see Wall Street lose ground against to his peers this year.
According to figures from the World Federation of Exchanges, US market capitalization accounted for 41.0% of the global total last year. That was just below the previous year’s 42.0%, which was the highest since 2003.
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According to WFE data, the US market share has averaged 38.3% since 2000. Excluding the three years from 2000 to 2002 – when the US share varied between 49.1% and 52.4% when the dotcom bubble peaked and burst – the average is 36.5%. .
Meanwhile, global stock market data provider MSCI estimates that US market capitalization as a share of the global total hit an all-time high of around 62% in 2021. It has since fallen slightly, but remains at a low. historically high level of 60%, well above the early 2000s peak around 55%.
Although the exact numbers may differ, the picture is strikingly similar: the trend of increasing US dominance in recent years is ripe for reversal.
“When a country dominates a global portfolio that much, it’s worth doing more in-depth research,” said Raina Oberoi, global head of equity solutions research at MSCI. “Market cap proportions and valuations alone don’t signal bubbles, but they can be early warning signs.”
THIS FEELING OF SHRINKAGE
According to Datastream, the global market cap is around $85 trillion, down from a peak of just under $100 trillion at the end of 2021. WFE data shows it ended last year around $100 trillion, up from a peak of around $125 trillion a year earlier.
Not only is the US share of this pie high by historical standards, US valuations are also historically high.
Calculations by Oberoi of MSCI and his colleagues show that US stocks are about 1.5 standard deviations more expensive than global non-US stocks, near the recent high of 2.0 times. The last time they were this expensive was in early 2002, just as the Nasdaq tech bubble burst.
They estimate that over the period 2008-2021, US equities have significantly outperformed the rest of the world outside the US by around five times. This length and depth of American exceptionalism is unlikely to be repeated.
Mark Haefele, chief investment officer of global wealth management at UBS, estimates that US stocks are around 40% more expensive than European and emerging market stocks. It is based on the S&P 500 index (.SPX) which is trading at around 17.7 times consensus estimates for 2023 earnings, compared to around 12.5 times for the MSCI Europe and EM indices.
This means US stocks are at one of their most expensive levels in 15 years. Add to that the fact that Wall Street is heavily biased towards technology, which is more susceptible to high interest rates and slowing growth, Haefele advises clients to broaden their international exposure.
“We expect international equities to outperform the S&P 500 in future market cycles,” he wrote in a Jan. 25 note.
Haefele didn’t give specific estimates, but it would be surprising if he were gloomier on Wall Street than analysts at research firm Topdown Charts. They expect real US equity returns of around 0.5% over the next five to 10 years, compared to around 9% for non-US developed markets and 10% for emerging markets.
Shrinking the US share of the global market cap pie will take time, but there are signs that investors’ holdings of US stocks have already been significantly reduced. Indeed, fund managers may now be significantly underexposed to US equities.
For most of the four-year period from 2018 to 2021, the most frequented trade among fund managers responding to Bank of America’s monthly surveys was an iteration of US long stocks, typically tech stocks.
But the latest survey in January showed investors’ exposure to US equities is historically low, with fund managers now the most underweight US stocks since 2005.
(Views expressed here are those of the author, columnist for Reuters.)
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By Jamie McGeever; Editing by Paul Simao
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