The US stock market has been the world’s top-performing market over the past decade.
Putting your money into a S&P 500 tracker fund would have given you around 15% per year in sterling terms (including dividends, before fees). Holding the MSCI World ex USA would have given you just 7%. Virtually nothing else would have come close.
Among developed economies, only Denmark returned around the same as the US stock market and that’s a tiny market driven by the success of insulin maker Novo Nordisk (50% of the index). Among major emerging markets, only Taiwan (powered by chipmaker Taiwan Semiconductor Manufacturing) and India even got into double-digit annual returns.
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Very few international investors would have been solely invested in the US stock market. Yet at least tracking the MSCI World index, instead of trying to be smart by overweighting cheaper markets elsewhere, was the clever choice in hindsight.
How the US stock market beat the world
Whether US stocks do the same this decade really depends on whether the past decade was down to stronger growth, higher margins or stocks re-rating onto higher valuations – and whether those trends can continue or whether we should expect them to revert back to long-term trends.
Over the ten years to the end of July, US valuations contributed far more to returns than any other region, according to data from asset manager WisdomTree.
The S&P 500 returned 13.8% per year up to that point in US dollar terms, of which 3.83 percentage points was due to valuation multiple expansion (ie, higher price/earnings ratios). European stocks saw valuation changes provide 1.39 percentage points of growth, while valuation changes in Japan actually detracted from returns because multiples shrank.
Profit margins grew in both the US and Europe at a similar rate, contributing 3.5 percentage points to returns. US companies tend to have higher margins than the rest of the world – which all being equal means they may deserve higher valuations – but they didn’t expand margins notably faster then European ones.
On the other hand, Japanese margins expanded hugely, adding 8.9 percentage points to returns. The bull case for Japan – that companies could improve profitability – has worked out (helped by the weak yen), yet valuations didn’t grow.
Lastly, what about growth? US companies grew sales much faster than anywhere else, contributing 4.6 percentage points to returns. Japanese companies grew about half that, again helped by the yen, while European sales barely increased at all.
US stocks could hit turbulence
In short, pretty much everything worked in the favour of the US stock market over the past decade (including the strength of the dollar).
Some of these factors probably will do again. But it’s hard to see valuations expanding more if the US is tightening policy faster than the rest of the world.
That will be a substantial headwind, meaning the US stock market is unlikely to repeat its spectacular outperformance over the next decade.
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