A Foreigner’s Take on U.S. Stock Market Revival

U.S. Equities Could Reclaim Market Leadership, Analyst Predicts

As inflation cools and the nonfarm payroll report regains its prominence, some normalcy has returned for traders. However, the U.S. stock market has experienced unusual underperformance lately.

Hubert de Barochez, senior markets economist at Capital Economics, notes that since mid-June, the MSCI USA index has returned less than 5%, only half of what global markets outside the U.S. have achieved. De Barochez highlights four main factors behind this lag.

First, U.S. tech stocks, which represent a large part of the market, have been struggling. While there’s been a recent bounce, the U.S. tech sector has seen sharper declines than elsewhere, and communication services have fallen in the U.S. but gained globally. Fears of an economic slowdown have raised doubts about tech earnings growth, with many companies previously “priced for perfection.”

Second, the U.S. market has a smaller share of financial stocks, which have benefited from a steepening yield curve. Financials make up just 13% of the U.S. index, compared to 22% of global markets outside the U.S., limiting their positive impact on U.S. returns.

Third, the U.S. dollar’s depreciation has boosted foreign equity returns in dollar terms. For instance, Japanese stocks saw significant gains, driven in part by the yen’s 8% rise against the dollar since mid-June.

Finally, a 30% surge in Chinese stocks, fueled by Beijing’s economic stimulus, has added to the pressure on U.S. equities.

Despite these challenges, de Barochez believes the U.S. market will eventually retake the lead, consistent with historical trends during past Fed easing cycles, which have typically led to stronger returns for U.S. stocks.

He also expects a renewed surge in investor enthusiasm for AI, potentially creating a stock market bubble. If AI is recognized as a transformative “general purpose technology” like the internet or the steam engine, equity valuations could soar even higher. However, de Barochez warns that a possible AI bubble burst around 2026 could hit U.S. stocks the hardest.