The Roots of U.S. Stocks Out-Performance

Continuing the post-crisis trend, U.S. stocks have outperformed the rest of the world this year. Russ explains why.

By most metrics this has been a remarkable year for investors. Stocks are up more than 15%, their best start in decades. Nor is it just stocks. The risk-adjusted return (Sharpe Ratio) on a typical stock/bond portfolio is producing similarly spectacular results. But while the magnitude of year-to-date returns is clearly abnormal, in another sense 2019 resembles the post-crisis norm: U.S. equities are outperforming the rest-of-the-world (ROW).

As has been the case in previous years, the out-performance of U.S. stocks over most other markets is being driven by a mix of better earnings growth and relentless multiple expansion (see Chart 1). Since 2010, the S&P 500 Index has outperformed (on a price basis) the MSCI ACWI ex-U.S. Index by an average of 70 basis points (bps) a month, a statistically significant difference.

While investors have become accustomed to this state of affairs, it was not always the case. In the period between 1990 and the end of 2009, the return differential between U.S. and non-U.S. equities was much smaller. During that period the average monthly performance spread was 22 bps, the median, which is less influenced by extreme observation, an even more insignificant 8 bps.

All of this raises the question: Why have U.S. stocks been perennial out-performers since the financial crisis? There are many potential explanations, but one simple one is profitability.

During the “aughts” decade, the average spread in profitability, measured by the return-on equity (ROE) between the S&P 500 Index and the MSCI ACWI-ex-U.S. Index was roughly 1.5%. Not only was the spread relatively narrow, but those years witnessed a prolonged period, leading up to and including the financial crisis, when profitability was higher outside of the United States.