Why U.S. Stocks Are a Better Bet Than International Equities
Recent Trends and Performance
Despite some international equities indexes outperforming the S&P 500 recently, there are indications that this trend may not persist. Key insights suggest that the long-term health of U.S. stocks remains more promising due to underlying corporate earnings trends. Yardeni Research, in a note dated February 17, highlights that the forward earnings of the U.S. MSCI stock price index continue to outpace that of the All Country World ex-U.S. MSCI stock price index. This trend points to a strong case for maintaining a significant allocation in U.S. stocks within a global equities portfolio.
Understanding the Earnings Trends
The analysis from Yardeni underscores the notion that while international equities may see temporary gains, the stability and growth potential of U.S. companies—reflected in their improving earnings forecasts—hold greater long-term investment appeal. The firm cites a favorable ratio of forward earnings per share for U.S. stocks versus the rest of the world, suggesting that a “Stay Home” approach may be more prudent for long-term investors, even as some may favor a “Go Global” investment strategy in the short term.
Impact of Tariffs and Trade Policies
Investors have been closely monitoring President Donald Trump’s tariff policies, as concerns rise regarding their potential negative effects on growth and domestic pricing. In early March, the White House implemented tariffs on aluminum and steel, raising apprehensions about reciprocal tariffs on nations imposing duties on U.S. exports. Yardeni notes that so far, the impact of these tariffs appears to weigh more heavily on the U.S., Canada, Mexico, and various emerging markets than China and many European nations. However, this dynamic could shift if reciprocal tariffs are enacted in April 2025.
Recent Market Performance Highlights
Despite geopolitical and economic concerns, the U.S. stock market has consistently shown resilience. The S&P 500 index recently closed at a record high of 6,129.58. Comparatively, the iShares MSCI ACW ex-U.S. ETF, which excludes U.S. stocks, saw an 8% year-to-date gain by mid-February, outperforming the S&P 500’s gain of 4.2% during the same period. Moreover, Germany’s equities also demonstrated significant strength, with the iShares MSCI Germany ETF hitting all-time highs not seen since 2007.
Viewing Emerging Markets
Emerging markets are experiencing increased investor interest, particularly with the iShares MSCI China ETF soaring by 15.2% year-to-date. However, experts warn that investing in such high-risk regions is only suitable for those with a considerable risk appetite. DataTrek Research’s co-founder Nicholas Colas notes that while U.S. stocks remain attractive, especially in sectors like financials, industrials, and healthcare, Europe and China are also gaining traction, albeit with heightened risk factors.
Stretched Valuations in the U.S. Market
Despite the moderate gains in the U.S. stock market, analysts express caution regarding the prevalent stretched valuations. Goldman Sachs Group’s wealth management division maintains that historical valuations should not be the sole determinant for market exit strategies. Their investment strategy group anticipates that the S&P 500 could finish the year between 6,200 and 6,300, implying continued growth potential for U.S. equities.
Conclusion: A Case for U.S. Stocks
In summary, while international equities may offer short-term investment opportunities, the underlying strength of U.S. corporate earnings, combined with the potential volatility and risk associated with global markets, makes U.S. stocks a more secure long-term investment. For investors looking to balance risk and performance in their portfolios, maintaining a higher allocation in the U.S. equity market seems prudent, supported by ongoing favorable earnings trends and the overall resilience of the U.S. economy.
Total market awareness and prudent strategic decisions become imperative as the geopolitical landscape evolves, and as the potential ramifications of policies like tariffs are fully realized.
