The ability of the U.S. stock market to keep an edge this year over equities elsewhere in the world hinges on the U.S. maintaining its economic and earnings growth advantage, the strength of the dollar and how global trade tensions resolve, investors said.
Spurred by fiscal policy benefits including a corporate tax cut, the U.S. economy’s standout momentum relative to other regions has underpinned Wall Street’s advantage this year, investors said.
“The outperformance of U.S. stocks reflects not just earnings, but expectations about U.S. economic growth versus other regions,” said Kristina Hooper, chief global market strategist at Invesco.
“Conventional investor wisdom is that the U.S. is going to continue to outperform other economies this year and hence investors should move more of their exposure to the U.S., Ms. Hooper said.
A clearer read of the U.S. economy will come with data such as the government’s monthly employment report on Friday and quarterly results from more than 140 S&P 500 companies, including Apple.
According to an IMF report this month, the U.S. is projected to post economic growth of 2.9% this year, up from 2.3% in 2017, while European advanced economies, and Japan and China, have slower growth than a year ago. The U.S. economy grew 4.1% in the second quarter, its fastest pace in nearly four years.
While returns for the U.S. benchmark S&P 500 index trail last year’s — they are up 6% so far in 2018 against a 10.5% gain at a similar point in 2017 — U.S. equities are easily beating indexes covering Europe, Japan and emerging markets after lagging or just keeping pace for all of last year.
Near all-time peak
After rebounding from a 10% correction earlier this year, the S&P 500 is close to an all-time high and on track for its best year relative to stocks in the rest of the world since 2014.
Returns themselves have been lower than many investors have come to expect. But on a relative basis, the U.S. continues to be the market leader, said Michael Arone, chief investment strategist at State Street Global Advisors.
U.S. stocks separated from equities elsewhere in particular during the second quarter, with investors citing a divergence in growth expectations.
Citi Research’s gauge on U.S. economic data surprises was solidly positive in April and May, when its barometer for eurozone surprises was sharply negative.
“There was a change in expectation from synchronized global growth to U.S. growth being better than the rest of the world really due to the fiscal tailwinds, said Sunitha Thomas, regional portfolio manager for Northern Trust Wealth Management.
The dollar surged against other major currencies starting in the second quarter, and investors said the greenback’s path will be an important factor determining relative equity performance.
The dollar’s gains aided U.S. equity fund returns against international funds, which required a costly translation into the greenback, investors said.
The dollar’s strength weighed on emerging markets, where debt costs have increased and weaker currencies sparked an investor retreat. Emerging market stocks overall have particularly lagged this year, declining 6%.