Why the US will continue to dominate global equity markets

US equities have continued to power on regardless of the country’s political woes, experts say

A trader works on the trading floor at the New York Stock Exchange. US equities, particularly Big Tech stocks, have continued to dominate despite the political issues the country faces. Reuters
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While the world asks whether the US has lost its mojo after its disastrous exit from Afghanistan, the country’s stock market continues to power on as if it doesn’t have a care in the world.

Washington’s superpower status may be under threat but after a decade of rip-roaring returns, most investors continue to believe that Wall Street is still the best place on Earth to invest their money.

US technology companies have conquered the world since the financial crisis and the country now boasts five companies worth $1 trillion or more: Apple, Amazon, Microsoft, Google owner Alphabet and Facebook.

US equities have continued to dominate regardless of the country’s political woes, Richard Hunter, head of markets at wealth platform Interactive Investor, says. “The S&P500 has risen by 105 per cent over the last year and is up 21 per cent year-to-date.”

The index of top US stocks now trades at a record high of around 4,500, while the Nasdaq technology index is regularly posting all-time highs of more than 15,000.

The strong US performance has been driven by trillions of dollars of fiscal and monetary stimulus, and historically low interest rates, Mr Hunter says. “Near-zero savings rates force investors to seek a punchier return by investing in shares.”

Yet there are also looming threats and, as the US discovered in Afghanistan, conditions on the ground can change very quickly.

Tougher regulation of technology companies and the country’s fractious relationship with China are both causes for concern, Mr Hunter says.

“The biggest worry is whether the US Federal Reserve will start tapering monetary stimulus before the end of the year and if the economy can stand on its own two feet without it,” he adds.

The biggest worry is whether the US Federal Reserve will start tapering monetary stimulus before the end of the year and if the economy can stand on its own two feet without it
Richard Hunter, head of markets, Interactive Investor

The stimulus continues to flow and US shares are likely to continue rising for now, but Mr Hunter says rival stock markets such as the UK’s FTSE 100 are now far cheaper and potentially offer better value.

“The recent spate of M&A activity, with US private equity firms snapping up undervalued UK companies, has helped the FTSE rise by more than 10 per cent so far this year,” Mr Hunter says.

The US will continue to dominate global equity markets over the coming decade, Peter Garnry, head of equity strategy at Saxo Bank, says.

“It dominates many high-growth technologies such as cloud computing, cyber security, digitalisation, semiconductors, machine learning and biotechnology,” he adds.

The US is lacking in one key area: it is trailing the green shift to renewable power and energy efficiency, Mr Garnry says. Tougher tech regulation and rising interest rates are also threats, he says, but the US remains the one to beat.

Yet the country is in serious fiscal trouble, with debts totalling $28.7tn, more than double the country’s annual gross domestic product, Chaddy Kirbaj, vice director at Swissquote Bank in Dubai, says. “The question is, do investors have a viable alternative? To put it bluntly: the answer is no.”

The US, along with Europe and Japan, will remain the preferred option for global investors, according to Mr Kirbaj.

Investing in shares is always unpredictable and the US stock market will suffer a correction at some point, Mr Kirbaj predicts. But investors must take a long-term view and look beyond current worries.

The question is, do investors have a viable alternative? To put it bluntly: the answer is no
Chaddy Kirbaj, vice director, Swissquote Bank

“The S&P 500 stood at around 1,200 two decades ago, today it’s above 4,500. Investors will also have generated dividends on top. That’s the timescale we should use when we think about investing,” he recommends.

However, Mr Kirbaj agrees that it may be time for cheaper, developed markets to play catch up, singling out Europe. “The US stock market is not yet finished as a superpower, but the rhythm is going to slow.”

US-listed companies make up an astonishing 60 per cent of the global stock market, evidence of the sheer clout of its major corporates, says Jason Hollands, managing director of Tilney Investment Services.

No country can hope to match its success in building companies from start-ups to multibillion-dollar firms.

“The US has a highly developed financial eco-system and deep pools of private capital, which is why so many global companies head there to raise capital,” he says.

China has a lot of catching up to do when it comes to churning out entrepreneurs and may never get there.

The country’s share of the MSCI global index is tiny compared with the US at just 4.1 per cent, Mr Hollands says.

“Providing the US does not lurch aggressively away from capitalism, it is going to remain the dominant stock market superpower for a long time yet, even if its political influence and prestige wanes,” he adds.

However, Mr Hollands believes the US may be overvalued, especially the Big Tech sector, while the Democratic Party’s “spending spree” could weaken public finances. “Right now, I see better value in markets such as the UK, Japan and Europe, where the earnings recovery still has further to run.”

Vijay Valecha, chief investment officer at Century Financial in Dubai, suggests that investors look beyond the obvious tech names like Apple and Amazon. “US technology brands such as PayPal, Oracle, Intel, Netflix, Tesla and Adobe are fast-growing companies that overshadow any other country’s big names.”

The US has suffered political and military setbacks before and its stock markets have still shone through, Mr Valecha says.

“Forget Afghanistan. Forget geopolitics. The US stock market will remain dominant. Investors can’t afford to ignore it,” he adds.

If the US stock market does crash at some point, that could be a good opportunity to get exposure for the next 20 years of action.

Updated: March 13, 2024, 12:34 PM