How Long Can US Stock Dominance Last?

Over the past decade and a half, the US has been the star performer in the global stock market, leading many investors to wonder what’s behind this sustained outperformance. And if the US is so strong, why even consider investing in other markets?

The answers boil down to a few key points:

• Geographic leadership shifts over time, with one region often dominating for years at a time.
• Performance differences often come down to the unique makeup of indices in each country—in terms of sectors, quality, growth, and other drivers.
• The ultimate drivers of geographic returns are earnings per share growth, dividends, changes in valuation multiples, and currency impacts. Any outlook on future returns by region should be based on these fundamentals.

Grasping these dynamics is essential for making smart investment choices so let’s explore each in turn.

Geographic Episodes Tend to Be Long and Clear

While the recent era of US dominance has been notable for its persistence, over the past several decades, geographic leadership has changed hands several times (Display 1).

Take a look at the US market’s journey: it surged coming into the early 1990s, lagged briefly in the mid-1990s, then dominated during the late 1990s, riding the wave of expansion and the dot-com bubble (which also coincided with economic crises in Russia and several other emerging countries). After the bubble burst, the US traded down against the rest of the world and was heavily outpaced by international stocks in the years leading up to the Global Financial Crisis. But since then, over the past 17 years (including the crisis itself), the US market’s leadership has gone almost completely unchecked.

As the world resettled post-pandemic, there was talk that international stocks could reclaim the spotlight in 2023, sparking speculation about the dawn of a new era. Yet the returns since then have told a different story. The age of US exceptionalism in the global markets has continued, driven by a relatively strong economy as well as impressive earnings growth and optimistic sentiment surrounding Big Tech, particularly given its AI exposure.

What Are You Buying?

A key challenge when comparing various equity indices, whether by size or geography, is the significant differences in their composition.

For instance, technology and communications stocks represent roughly 41% of the US market, while making up only about 19% of the non-US market (Display 2). That dramatically skews US stocks toward some of the major growth stories of the past decade. Only time will tell how well those companies are positioned for the next phase of growth and the transformative impacts of AI.

Meanwhile the rest of the world has substantially higher exposure to financial companies, especially banks, and also tilts toward industrials and materials. At a high level, that means US vs. non-US markets respond differently to secular and cyclical trends.

What’s more, our research has shown that it’s not just sector composition that matters. Even within most sectors, US companies have typically delivered higher rates of earnings growth along with lower earnings volatility. Other studies have also pointed to higher returns on capital. In a global economy dominated by multinational companies, what drives this performance? While some might point to tax advantages, our focus on pretax metrics suggests there’s more at play. We believe, though we’re not entirely certain, that part of this “secret sauce” is cultural—American firms tend to be more productive and competitive.

Explaining Geographic Cycles

By examining historical returns, we can break down the factors that have shaped relative performance. Forecasting what future drivers may look like, however, is a much harder task.

So, what tends to drive regional performance differences? Essentially, it’s the same factors that influence any stock or index, just viewed across different markets. First and foremost is EPS growth, the cornerstone of long-term equity returns. That can then be further broken down into sales growth, margin changes, and buybacks. At the index level, it also depends on sector exposure.

Dividends are the other major driver of long-term equity returns. Valuations, too, play a crucial role, particularly in the short to medium term, where they can expand or contract and meaningfully impact returns. Lastly, when assessing global returns, currency fluctuations—whether headwinds or tailwinds—also make a notable contribution.

How have these factors shaped performance in recent history? Let’s look at the past two major cycles—the period of international dominance leading up to the Global Financial Crisis and the current era of US exceptionalism we’re witnessing today.

While US equities generated modest returns from 2002–2007—appreciating 41% in nearly six years—earnings grew by three times that amount, at 128%. The major headwind for US stocks? Multiple contraction, with valuations cut almost in half (Display 3).

Meanwhile, earnings in developed international markets grew more slowly, increasing by 115% during that same period. Currency tailwinds boosted them another 58%. Because these elements are multiplicative¹ rather than additive, this resulted in 240% earnings growth in US dollar terms. In other words, despite multiples contracting, this region still outperformed the US by 100 percentage points, thanks to robust earnings growth, favorable currency impacts, and a dividend that was three times higher.

What about emerging markets? What unfolded there was largely the story of China. We’ve highlighted this separately due to its significance, but we’ll discuss the emerging market-wide impact here. Earnings in these markets grew by 175%, with a small currency tailwind pushing the total to 190% in US dollar terms. Meanwhile, unlike the US or developed international markets, multiples in emerging markets rose by nearly one-third. Along similar lines, dividends in these regions vastly outpaced those in the US and Europe.

On the whole, emerging markets stocks ultimately returned 337% during this period—well above either the 41% in the US or the 141% in developed international markets.

What about the most recent period, when the US has dominated?

We see much the opposite of what unfolded in the prior period. US earnings growth has substantially outpaced that of developed international and emerging markets, with the strong dollar further benefiting the US (Display 4). And, while multiples for US stocks have expanded slightly, those of other developed and emerging peers have contracted. On top of that, the US has also enjoyed a higher dividend contribution to earnings.

When combining all these factors, the US has eclipsed international stocks by a wide margin: +263% versus +37% for developed international and +13% for emerging markets.

A Hazy Crystal Ball

What does all of this portend for the future? Like all forecasts, it’s hard to say. But that doesn’t stop us from highlighting some advantages and disadvantages.

On the earnings front, the US likely holds an edge. It benefits from a sector bias toward secular growth—which international markets generally lack—along with a competitiveness advantage within sectors (though if global peers become more competitive, that could erode at least some of that edge).

We have more confidence in the outlook when it comes to the US and developed markets. Forecasting earnings growth in emerging markets is notoriously challenging, and it may surprise you to learn that, unlike in developed economies, earnings growth in these regions has little correlation with GDP growth. This adds an extra layer of uncertainty to any outlook.

When it comes to dividends, international stocks appear to have an edge right now due to their higher starting yields. Yet, if the US can achieve faster earnings growth, that upper hand may fade. Growth in US dividends could offset the initial yield advantage of its international counterparts.

Multiples are always difficult to call. US valuations are currently approaching their highest levels relative to the rest of the world. This seems merited, given the quality and growth aspects we’ve discussed. But US multiples may be a little too high right now, creating a potential headwind to the US going forward.

Finally, currency impacts will also play a role. Throughout our extensive experience in the industry, neither we nor our colleagues have ever encountered a reliable long-term predictive model for the dollar. If anything, we think the US dollar’s performance is likely to correlate to some degree with where we see stronger earnings growth and multiple expansion, though it does introduce a lot of noise into forecasts.

As for our investors, we believe international diversification is essential—not only to capitalize on different economic cycles, but also because many of the world’s best companies and stocks are not listed in the US. What’s more, given the uncertainty about which markets will perform best over the next decade, we find it best to allocate globally while maintaining a moderate tilt towards the US.