One of the most consistent themes in financial markets over the past 15 years has been the outperformance of US equities. A dollar invested in the S&P 500 at the low of the financial crisis in 2009 would now be worth over $10, more than double the return from European equities and around three times the return from UK, emerging markets or Chinese equities. An allocation of 100% US equities would have been difficult to beat. Why have US equities been so successful and will the trend continue?

Chart 1: US equity market’s runaway success since the Global Financial Crash

S&P 500, MSCI Europe, MSCI Japan, MSCI United Kingdom, MSCI China, MSCI Emerging Markets total return indices in USD rebased to 100 on 09/03/2029. Source: LSEG Datastream, Fidelity International, September 2024.

A big part of the story behind US exceptionalism over the past 15 years has been the stellar performance of the technology sector. The US is home to the majority of the largest and fastest growing tech companies in the world and this has helped propel US equity markets in the information age.  Tech has fantastic margins and, even though it has often looked expensive on valuations measures, earnings growth has always been there to deliver returns.

An overlapping reason is that the US also features a concentrated group of idiosyncratic companies, loosely known as the Magnificent 7, that have been particularly successful in protecting their competitive moats. These companies have come to dominate and even monopolise their respective areas of business and managed to avoid a high degree of direct competition with each other. They have also been quick to acquire smaller competitors that might threaten their competitive advantage.

The strength of the US dollar is another contributing factor, boosting the returns of dollar denominated assets compared to those in other currencies. The US also has high productivity compared to other regions. Finally, the 2017 tax cuts provided a one-off boost to the US stock market.

Can US exceptionalism can continue?

There’s no compelling reason why the dominance of the US equity market cannot continue for some time. Granted, the tax cuts and dollar appreciation are unlikely to be repeated. However the US has better demographics than Europe or China and hence has a long-term edge over those regions, while its better productivity keeps wages and therefore consumption high.

Furthermore, the US is the largest oil and gas producer in the world, which has insulated it from recent energy market shocks and should do so again in future. The US is also remains a hotbed of innovation, while Europe tends to be more bureaucratic, which can stifle innovation. The longer-term beneficiaries of the AI revolution remain to be determined, but US companies currently look better poised to capitalise than those of other regions.

What could dethrone the US?

The chief caveat to this is that none of the above reasons in favour of continued US exceptionalism are particularly secret, meaning a lot of it should already be reflected in the price. US equity valuations are already relatively high, especially compared to other regions, so there is scope for some disappointment to creep in if the US doesn’t live up to the high expectations.

US valuations began to drift higher than other regions in 2017. For each dollar of expected earnings, investors now pay over $20 in the US, compared to only $15 in Japan, $14 in Europe, and less than $10 in China. Higher valuations today tend to reduce long-term returns.

Chart 2: Investors already pay more for US equities

MSCI indices. Source: LSEG Datastream, Fidelity International, September 2024.

Another long-term factor that could hamper US exceptionalism is the country’s large fiscal deficit, currently running at around 7%. Neither of the two main political parties appear interested in reducing it and US public debt is growing fast. Eventually it could require a period of fiscal austerity to bring it under control, which would dampen US economic growth. Finally, the US enjoys the privilege of controlling the world’s reserve currency. Although we don’t expect the dollar to be usurped anytime soon, even a reduction of its dominance could have knock on effects on US equity markets.

Diversification still key

The long-term fundamentals for US equities look positive on a relative basis. However, other factors such as technicals and valuations, as well as shorter-term fluctuations, also play a role in our investment decisions. We will continue to evaluate markets using our comprehensive investment framework.

Having said that, we still firmly believe that diversification is critical to achieve long-term risk-adjusted outperformance, not just across asset classes, but across regions, sectors, and styles. Unexpected events will always occur, making an approach that combines a broad range of risk and return drivers an essential component of a robust long-term portfolio.

Our Multi Asset Allocator range

We advocate taking a long-term diversified approach to investing and Our Multi Asset Allocator range is an example of a fund offering which gives investors the opportunity to access different asset classes and regions at low-cost. The range is supported by a well-resourced and experienced team of research analysts and rated by the major risk rating agencies, enabling investors to select the level of risk they are comfortable with.

Find out more about Fidelity’s Multi Asset Allocator range

Important information

This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The investment policy of these funds means they invest mainly in units in collective investment schemes. Fidelity’s Multi Asset funds use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can also be more volatile than other more developed markets. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates rise and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.