US Exceptionalism and Market Overconcentration

AMERICAN COMPANIES ARE UNMATCHED

The following chart may not have a big investing takeaway other than to help us appreciate the sheer size of the American stock market. As it stands, 20 of the world’s 25 most valuable companies (and 58 of the top 100) are in the U.S. For all the talk about the decline of America as a whole, American businesses continue to thrive while the rest of the world plays catch-up. (Source: ​Sherwood​)

International developed equities and the U.S. dollar:

This chart below compares U.S. and international developed equity returns, showing that international outperformance often aligns with dollar weakness.

Favorable exchange rates and increased investment flows support international returns when the dollar falls. The recent strong dollar cycle favored U.S. equities, but current dollar weakness and cheaper international valuations suggest a possible shift ahead.

But widen the lens and it becomes clear that US and non-US stocks have traded periods of outperformance over the last 50 years at irregular intervals (Display).

The most recent run of US dominance ended in 2021. Between October 2022 and May 2023—a particularly strong stretch for non-US stocks—the MSCI EAFE Index of developed-market stocks outside the US and Canada delivered a net return of 26.2%, outpacing both that of the MSCI USA (13%) and the S&P 500 (13.3%).

Pay Attention to Market Concentration

Market concentration risk in the US is high. The technology-heavy top 10 components in the S&P 500 have accounted for more than 90% of index returns in 2023 so far. Non-US indices offer diversification through access to companies underrepresented in the US, such as European luxury goods makers, and important trends, including industrial automation in Asia.

US stocks still offer solid long-term return potential, in our view. But we think investors may have much to gain from venturing beyond the border to build a more globally diversified equity allocation.