Article

This has been a US-led equity bull market

American companies now make up 67% of the World Index of advanced country shares. Can the rising dominance of US businesses in equity markets continue?

| 4 min read

We have got used to reading about the US stock market hitting new highs. Over the last five years, the S&P 500 index of larger US companies has surged by 117%. The world’s second-largest stock market, the technology-oriented US Nasdaq, has seen a stunning 205% performance over the same period.

  • 117% S&P 500 in the last 5 years

It has been a period of US exceptionalism. Leading American companies have transformed consumer, retail, communications, media and technology with compelling offers in social media, online shopping, personal computers, digital software, information access and even electric cars. These large corporations have taken market share around the world and have built strongly cash-positive and profitable businesses at the expense of more traditional businesses based elsewhere.

The valuations have also been boosted over the last year and half by the huge monetary stimulus administered by the Federal Reserve to offset the damaging economic effects of the anti-pandemic policies pursued in most places.

Pedestrian performance

Other markets have not been so lively. Japan’s stock market is still way below the highs of more than thirty years ago, though it has managed 69%returns over the last five years. China languishes well below its high of 2007 and has produced a return of just 9% over five years on the Shanghai composite index. Hong Kong has also suffered, with a return of just 10% over five years – and its main index remains below its 2018 high. In the European Union, Italy remains well below its 2000 high, Spain is below its 2007 peak – whilst France has just got back its performance, recently crossing its 2000 high to make a new record. Germany has been making new highs and has managed to deliver a 50% return over five years.

A few markets in the world have responded favourably alongside the US to the new conditions. The Indian index has provided a great return of 126% over five years and is making new highs. Taiwan has hit a new high and a return of 96% over five years. Taiwan is seen as part of the US-technological revolution, with its central role in making microprocessors for the west. India seems to be benefitting from more cautious views on China, with more western investors seeing India as the next large country that might grow fast and generate more corporate wealth as a result.

It is unusual for a single country market to sustain world leadership indefinitely. Japan was strongly fancied in the 1980s, and tipped as a big rival to the US, only for it to slump with a banking and property crash hitting borrowing and valuations. Commodity sectors and countries with a strong position in commodities were fancied around the time of the western banking crash and recession to benefit from a forecasted “supercycle” in commodities as China greatly expanded industry and commodity use, only for the bubble to puncture.

It is unusual for a single country market to sustain world leadership indefinitely.

Can US outperformance continue

US leadership has, so far, proved better based. After all, the US remains the largest world economy, and still has a GDP per head more than six times that of China, the second largest. The trillionaire companies that have emerged have strong market positions and are generating good profits backed by cash.

Those looking for some mean reversion, some end to the perpetual US-led bull market, will worry about what happens to US valuations when the Fed does finally stop creating money and buying bonds. There are also the coming higher taxes, more intense regulations and possible government interference in their business models, let alone the possibility that the rest of the world might start to find competitor corporations that could take on the US giants.

The US is now a mighty 67% of the World Index of advanced country shares, and 59% of the whole world index. In each index, the top six holdings are the same and all are American. They are Apple, Microsoft, Alphabet, Amazon, Facebook and Tesla. These are high figures, but they can be sustained all the time the Fed assists the expensive valuations by keeping rates low and markets liquid, and all the time the US giants retain their zest for change, for consumer excellence and for growing their cash and profit lines. We will watch out for what might change this long run of US dominance.

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This has been a US-led equity bull market

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