Seven large US tech companies have driven all of the gains in global stocks this year, pushing the US dominance of equity markets to new heights.
The so-called “magnificent seven” — Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla — have been propping up the S&P 500 index of blue-chip US companies for most of the year because of investor excitement about the growth of artificial intelligence.
The trend has become so extreme that it is dominating markets abroad. But for the seven companies, MSCI’s benchmark All-Country World index of almost 3,000 large and midsized companies would have declined in the year to date, according to Bloomberg data.
The seven have added almost $4tn in market capitalisation in 2023, compared with $3.4tn in gains for the MSCI index as a whole. They have added a combined 40 points to the index, which has risen 37 points overall.
Unless there is a sharp turnaround by December, 2023 will mark the eighth year in the past decade that the US share of global market capitalisation has risen.
US companies now account for 61 per cent of the $60tn index, compared with less than 50 per cent a decade ago. The largest 10 stocks make up almost 19 per cent of the index, up from 8 per cent in 2013.
The gains in the US this year have punctured the predictions of investors who had argued bargain valuations would help other markets around the world catch up with the US.
“The history of markets is littered with great investors felled by a simple value trap,” said Max Gokhman, head of investment strategy for Franklin Templeton Investment Solutions. “When we look at the US versus the rest of the world, I think there’s a reason why it’s been the better-performing asset class for a long time.”
There is little disagreement over whether US stocks look expensive compared to the rest of the world. The S&P 500 trades at about 18 times the value of its expected earnings over the next 12 months, compared with 12 times for the MSCI all-country excluding US stocks, according to JPMorgan Asset Management data.
The question is whether there are realistic triggers for a change.
Jurrien Timmer, director of global macro at Fidelity, said: “The valuation [of non-US stocks] is very tempting . . . but just because something is cheap doesn’t mean it’s going to outperform.”
Meanwhile, he added, large tech stocks “could have more room to run” as there is not yet an obvious catalyst for them to reverse. Some of them were hit by the recent increase in Treasury yields, but on average have held up better than the broader market.
In a sign of the continued strength of investor interest, OpenAI, the privately owned US-based group behind ChatGPT, has been discussing a share sale with investors that would value it about $86bn, three times what it was worth in April.
Franklin Templeton’s Gokhman said the magnificent seven could come under pressure next year if they do not show enough tangible benefits from the growth of AI. But he added that even if AI enthusiasm wanes, growth stocks — which are far more common in the US — stand to benefit when interest rates start to decline.
“If we think rates will go higher from here that would be bad for the US, but if we’re past or near the peak, which most people would agree with . . . there will be a tailwind from falling rates,” he said.
Besides the effects of high bond yields, global stocks have also come under pressure in recent weeks from the war between Israel and Hamas. Several investors said geopolitical worries would have a greater impact outside the US, an additional obstacle to closing the valuation gap.
Rich Steinberg, chief market strategist at the Colony Group, a wealth manager, said: “Given some of the geopolitical risks in front of us and in the future, there may be some hesitancy to make major outsized bets to ex-US because people have been burned before.”
The debate over US dominance of global markets has repercussions beyond investor asset allocation. It has contributed to fears in financial centres such as London and Frankfurt of a potential US monopoly that becomes self-reinforcing, draining liquidity from other markets and encouraging companies to move their listings to reach higher valuations and trading volumes in the US.
“The more the US continues to trade at a premium, the more the topic will be discussed within companies,” said Luca Fina, head of equity at Generali Investors, the asset management arm of Italy’s largest insurer.
Fina said he expects European stocks to close some of the gap with the US in the short-term if the economic outlook improves, but said: “Over the mid- to long term, the US probably will continue to be perceived as the place to be.”
“At the end of the day, the most important is the ability of the US to be the best environment for innovation, for creating companies that are disruptive,” he added.
Still, some are optimistic about the longer-term outlook for global stocks. JPMorgan’s asset management arm last week published forecasts predicting emerging and developed markets outside the US would provide better returns than US stocks over the next decade.
David Kelly, JPMorgan Asset Management’s chief global market strategist, said there had been “a trickle” of funds flowing to international equities, but acknowledged that similar bets in the recent past had “left a sour taste in the mouth” for many investors.
He said the difference this time was that the bank expects the dollar to gradually weaken because of stronger overseas growth and narrowing differences in interest rates. That would make non-US investments more appealing for US-based traders, who are responsible for the bulk of global stock investing.
“International [equities] will do well when US investors actually think it’s a good idea,” Kelly said. “I think the great reconciliation between US investors and international would begin with a dollar decline.”