Can International Stocks Surpass U.S. Performance?
According to recent insights from a Vanguard economist, the landscape for stock investments is shifting, suggesting that international markets might finally outpace U.S. stocks.
After facing challenges early in the year, U.S. stocks have rebounded impressively. The S&P 500 index has increased by approximately 16% year-to-date, while the Nasdaq Composite has seen an even more significant rise of about 21%. Also noteworthy is the Russell 3000 index, which has achieved a remarkable 15% gain.
However, while these figures are commendable, it's crucial to note that international stocks are leading the charge this year.
The FTSE Global All-Cap Ex US index has surged nearly 28% year-to-date, with leading indexes across Europe, Asia, and Emerging Markets also exhibiting strong performance. Specifically, the MSCI Europe index has climbed by 29%, the MSCI AC Asia Pacific index has increased by 28%, and the MSCI Emerging Markets index has posted an impressive 33% return.
This marks a significant turnaround from the trends observed over the past five to ten years, where U.S. stocks consistently outperformed their global counterparts.
Many investors are left contemplating whether this pattern of international outperformance indicates the beginning of a new trend or is simply a fleeting moment. Recently, Qian Wang, Vanguard’s chief economist for the Asia-Pacific region, shared her insights on the matter.
The short answer, according to her, is yes, but with some important considerations.
Are Valuations Indicating a Bubble in U.S. Stocks?
This year has brought about significant volatility for U.S. stocks, with various factors influencing this situation. However, the recovery since April has sparked concerns regarding potential overvaluations, particularly seen in the tech and AI sectors. Are we witnessing a bubble driven by AI hype?
“For several years, we have pointed out the increasing overvaluation of U.S. stocks. Yet, propelled by major tech firms, U.S. stocks have frequently reached new all-time highs. Unlike what occurred during the dot-com bubble over 25 years ago, we cannot categorically state that U.S. stocks are in a bubble,” Wang noted.
Wang highlighted that the leading tech firms are still generating substantial profits. Additionally, the prevailing environment that encourages innovation, coupled with relatively low regulation and robust corporate balance sheets, can rationalize the current high valuations, at least in the short term.
“Despite a more conservative outlook for long-term returns, the combination of economic growth, rising earnings, and the anticipated easing of Federal Reserve policies to mitigate risks creates an almost ideal scenario that could bolster U.S. market returns in the near future,” she stated.
Over the long haul, the story may change.
“Our findings indicate that over extended periods, typically around a decade or more, valuations tend to act as a gravitational force, ultimately leading returns to revert to historical averages,” Wang explained.
Valuations do not generally initiate market corrections but can increase vulnerability to shocks, meaning factors like renewed recession concerns, disappointing earnings, inflation spikes, slow Fed easing, geopolitical issues, or a decline in AI investments could heighten risks associated with already inflated valuations.
Rationale Behind U.S. Stocks Lagging International Equities
Vanguard economists predict that this reversion in valuations may inhibit the growth of U.S. stocks in the long term.
“Our analyses suggest that U.S. equities may lag behind non-U.S. stocks in the coming decade,” Wang indicated.
Nevertheless, she mentioned the possibility of U.S. stocks outperforming, largely due to the influence of AI technology.
“The transformative potential of AI is a significant boost to the U.S. market. If the full benefits of AI are realized, U.S. firms might sustain considerable growth,” Wang remarked.
However, she cautioned that international companies might gain even more from the widespread adoption and integration of AI into the broader economy.
“There is significant potential abroad, where AI and automation can significantly enhance productivity and efficiency, enabling international firms to catch up to their U.S. counterparts,” Wang stated. “Conversely, were AI to underperform, the decline of non-U.S. markets would likely be less severe than that of U.S. markets.”
Additionally, other influencing elements could favor international stocks, such as heightened defense expenditures and favorable policy modifications that could spur economic expansion. Currency fluctuations may pose less of a challenge for the U.S. market as investors increasingly diversify away from U.S. dollar assets.
Ultimately, Wang advocates for diversification in one's investment portfolio.
“Placing all investments into either U.S. or international markets is not advisable. Instead, investors should ensure a diversified approach, potentially leaning more towards international assets in the long run,” Wang advised.
Frequently Asked Questions
What are the current trends in U.S. and international stocks?
U.S. stocks have seen strong gains, but international stocks have outperformed them this year significantly.
What does Vanguard’s economist say about U.S. stocks?
Qian Wang suggests that while U.S. stocks have strong tech performance, they may be overvalued and could lag international stocks moving forward.
What role does AI play in stock performance?
AI is seen as a major tailwind for U.S. stocks but could benefit international companies even more in the long term.
Is it wise to invest solely in U.S. stocks?
Vanguard recommends diversifying investments to include international stocks for balanced growth.
What long-term projections does Vanguard make for U.S. equities?
Vanguard's analysis indicates that U.S. stocks might lag behind international stocks over the next decade.
