GAM Investments’ Paul Markham analyses the factors behind the increased Americanisation of world equity indices. Paul also assesses how investors can best capture global stock market opportunities in an era of increased US megacap dominance.
24 January 2025
As active investors and stock pickers, it is our job to identify and favour winners. And as far as stock markets are concerned, there has been no bigger winner on the global stage over the last five years than the US market.
Although many of us know all about the theme of US outperformance, the numbers still make for stark reading. Over five years to the end of November 2024, the MSCI USA Index returned 108.4%1, compared to 29.9% from the MSCI ACWI ex-US index2.
Over those five years, that equates to an annualised return of 15.8%1 from US equities, compared only 5.4%2 from global ex-US equities.
And the US has outperformed its global peers in 8 out of the last 10 calendar years3.
This degree of sustained outperformance has been hugely significant – anyone doubting this should consider the effect of any consistent under-allocation to the US market. For even the most adroit stock picker, underweighting the US market over the last five to 10 years would have been like swimming against the tide.
US market leadership: a reward for consistent success
One result of this sustained US outperformance has been a marked increase in US stocks’ weightings in global indices.
Way back in 2010, US stocks made up around 50% of the MSCI World Index. By the end of 2018, the US weighting had risen to circa 60%, and by 30 November 2024 to approximately 74%4.
While this growing level of US dominance on the global stock market stage has raised eyebrows in some quarters, above all I think we should recognise that US market leadership is a function of superior and sustained earnings growth.
Over the last decade, US corporate earnings in USD terms have grown by around 9% on an annualised basis, compared to 2-3% in Europe and around 1%5 in emerging markets (EMs), albeit the strength of the USD has weighed on the latter.
So what lies behind this long-term US corporate success, and can US market leadership continue?
Technology: America First
The US is home to many of the world’s most successful tech companies. Not only have megacaps like Amazon, Apple, and Nvidia been leaders in innovation in recent years, they have delivered hugely attractive returns for investors (circa +165%, 250%, and 2,540%6 respectively over five years to the end of November 2024).
So much so that the combined weighting of the IT and Communication Services (which includes tech-centred businesses such as Meta Platforms) sectors amounts to just over 40%7 of the S&P 500 Index. In that regard, the success of tech-related companies has been a major factor in US equity leadership.
R&D-led innovation and access to capital
The US’s world-leading innovation-focused universities attract talent from within the US and abroad, and US businesses tap into this resource. North American companies account for circa 30% of global research and development (R&D) spending, far outstripping that of European counterparts (circa 20%); although Far eastern companies, principally in China (26%) and South Korea (4%)8, have been closing the gap on their US competitors. But the US has by far the deepest and most liquid capital markets, providing companies at all stages of their development with access to funds to foster growth and/or enhance their stability.
Global earnings footprint
While the US represents a market of over 340 million9 consumers, owning US-listed shares gives investors exposure to a truly global earnings footprint. S&P Dow Jones estimates that on average, constituents of the S&P 500 Index generate around 40%10 of their revenues from outside the US, and for the Magnificent Seven stocks specifically, the figure rises to nearly 50%.11
Market-friendly, pro-business environment, and a robust economic backdrop
The US’s ‘safe haven’ appeal is partly founded on the record of nimble policy responses. Regulators and central bankers in the US have been more responsive during crises than in other regions, such as the Federal Reserve’s rapid implementation of support measures during the Global Financial Crisis, certainly relative to its European peers. And while Europe-based investors are ready and willing to diversify globally, US retail investors have been more minded to invest domestically. Although investors need to be vigilant over political factors and trade risks – with President-elect Trump’s appointment of JFK Jnr recently triggering a selloff in some US pharma stocks, for example – as my colleague Julian Howard recently noted, there can be a downside on focusing excessively on politics and elections rather than the positive economic and corporate-level outlook.
For stock pickers, valuations are key, in the US and elsewhere
While present valuations in the US stock markets can appear stretched on some metrics, with the average price to earnings (P/E) ratio of the S&P 500 Index of around 28, compared to circa 16 in Europe and Japan, and approximately 1412 in EMs, we believe that, in many cases, the growth potential, certainly relative to other markets, goes a long way to justify the share prices.
In the US market, as much as any other, it is vital for active investors to utilise the right tools to help with stock selection. We are looking for companies that can consistently create value over a long period. If a company generates a Return on Invested Capital (ROIC), and consistently reinvests its earnings at high marginal returns on invested capital, then that can be very interesting. Plainly typical capital requirements vary between sector, and, given the heavy representation of tech stocks in the US market, ROIC and Return on Capital Employed (RoCE) in the US market are typically higher than other markets where capital-intensive industries like utilities or healthcare might be more prominent. Hence, we use our ROIC/reinvestment framework in conjunction with a range of other stock selection criteria, for example aiming to identify businesses operating in areas with higher barriers to entry, also looking at switching costs, scope for economies of scale and product/service differentiation.
US equities set to remain a major component of global portfolios
While we have pared back some of our overall US exposure across our portfolios recently on valuation grounds, we take the view that the earnings growth prospects for US companies as a whole offer compelling justification for their substantial weighting in global portfolios. Nevertheless, we maintain our view that a truly global stock picking approach – looking for attractively valued opportunities across the full spectrum of our investable universe without fear or favour for or against US companies, will be in the best long-term interests of our investors. On a long-term thematic basis, given the preponderance of US names as global leaders in the tech space, and the dominant role they will continue to play in long-term themes such as digitisation, US equities look set to remain a key component of diversified global equity strategies. For investors, a continuation of the American corporate success story will probably be no bad thing.
Paul Markham leads Global Equity strategies at GAM Investments.
1 Source: MSCI, December 2024, gross returns, https://www.msci.com/documents/10199/255599/msci-usa-index-gross.pdf
2Source: MSCI, December 2024, gross returns, https://www.msci.com/documents/10199/aec27c01-671c-4bd6-84e2-77391a467a5d
3Source: GAM, MSCI, December 2024
4Source: Societe Generale, Datastream, November 2024
5Source: US Bureau of Economic Analysis, Bloomberg, December 2024 https://www.bea.gov/data/income-saving/corporate-profits
6Source: Tradingeconomics, December 2024.
7Source: S&P Global, December 2024.
8Source: WIPO, December 2024. https://www.wipo.int/web/global-innovation-index/w/blogs/2024/end-of-year-edition
9Source: US Census Bureau, July 2024. https://www.census.gov/library/stories/2024/12/population-estimates.html
10Source: S&P Global, October 2024. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/international-revenues-dip-for-group-of-s-p-500-companies-in-q2-2024-85937518
11Source: Goldman Sachs, December 2024. https://www.goldmansachs.com/insights/articles/the-s-and-p-500-is-forecast-to-return-10-percent-in-2025
12Source: Macrotrends, December 2024.
2Source: MSCI, December 2024, gross returns, https://www.msci.com/documents/10199/aec27c01-671c-4bd6-84e2-77391a467a5d
3Source: GAM, MSCI, December 2024
4Source: Societe Generale, Datastream, November 2024
5Source: US Bureau of Economic Analysis, Bloomberg, December 2024 https://www.bea.gov/data/income-saving/corporate-profits
6Source: Tradingeconomics, December 2024.
7Source: S&P Global, December 2024.
8Source: WIPO, December 2024. https://www.wipo.int/web/global-innovation-index/w/blogs/2024/end-of-year-edition
9Source: US Census Bureau, July 2024. https://www.census.gov/library/stories/2024/12/population-estimates.html
10Source: S&P Global, October 2024. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/international-revenues-dip-for-group-of-s-p-500-companies-in-q2-2024-85937518
11Source: Goldman Sachs, December 2024. https://www.goldmansachs.com/insights/articles/the-s-and-p-500-is-forecast-to-return-10-percent-in-2025
12Source: Macrotrends, December 2024.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The S&P 500 Index is a stock index tracking the performance of approximately 500 of the largest, publicly traded companies in the United States. The MSCI USA Index aims to measure the performance of the large and mid-cap segments of the US market. With circa 593 constituents, the index covers approximately 85% of the free float-adjusted market capitalisation in the US. The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) countries. With 1,409 constituents, the index covers approximately 85% of the free float-adjusted market capitalisation in each country. The MSCI World ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries*-- excluding the US. With 807 constituents, the index covers approximately 85% of the free float-adjusted market capitalisation in each country. The MSCI ACWI ex-USA Index is a stock market index that includes large and mid-cap stocks from 22 developed markets and 24 emerging markets, excluding the US. It aims to represent approximately 85% of the global equity opportunity set outside the US.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark. Funds managed by the GAM Global Equities team have held exposure to stocks mentioned in this document, including Nvidia, Amazon, Apple and Meta during the last five years.
This article contains forward-looking statements relating to the objectives, opportunities, and the future performance of the equity markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
This disclosure shall in no way constitute a waiver or limitation of any rights a person may have under such laws and/or regulations.
In the United Kingdom, this material has been issued and approved by GAM London Ltd, 8 Finsbury Circus, London EC2M 7GB, authorised and regulated by the Financial Conduct Authority.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The S&P 500 Index is a stock index tracking the performance of approximately 500 of the largest, publicly traded companies in the United States. The MSCI USA Index aims to measure the performance of the large and mid-cap segments of the US market. With circa 593 constituents, the index covers approximately 85% of the free float-adjusted market capitalisation in the US. The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) countries. With 1,409 constituents, the index covers approximately 85% of the free float-adjusted market capitalisation in each country. The MSCI World ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries*-- excluding the US. With 807 constituents, the index covers approximately 85% of the free float-adjusted market capitalisation in each country. The MSCI ACWI ex-USA Index is a stock market index that includes large and mid-cap stocks from 22 developed markets and 24 emerging markets, excluding the US. It aims to represent approximately 85% of the global equity opportunity set outside the US.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark. Funds managed by the GAM Global Equities team have held exposure to stocks mentioned in this document, including Nvidia, Amazon, Apple and Meta during the last five years.
This article contains forward-looking statements relating to the objectives, opportunities, and the future performance of the equity markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
This disclosure shall in no way constitute a waiver or limitation of any rights a person may have under such laws and/or regulations.
In the United Kingdom, this material has been issued and approved by GAM London Ltd, 8 Finsbury Circus, London EC2M 7GB, authorised and regulated by the Financial Conduct Authority.