U.S. stocks, economy remain global exceptions with another rich year

The S&P 500 will almost certainly end 2024 with gains of 20% or more for the second consecutive year, and the benchmark index has increased more than 50% total in the last 24 months.

Investors have no doubt enjoyed the run, but many do not realize this massive surge has come without the help of global economic tailwinds. On the contrary, U.S. stocks and the U.S. economy are very much outliers on the international stage.

Global equity benchmarks lag far behind the U.S. when measuring performance through the trailing two years. The MSCI All-Country World Ex-U.S. index, which includes both developed and emerging markets, has increased roughly 25% total in that time. That’s less than half as much as U.S. stocks.

China’s Hang Seng stock index has gained only 5% total in the past two years as the country deals with slowing economic growth. Germany, the largest economy in Europe, narrowly avoided a recession with its latest GDP print. Its major stock index, the DAX, is up more than 40% in the past two years, which is impressive considering the context but still well behind the U.S.

Japan’s Nikkei stock index looks similar to Germany, up slightly more than 40% through the past two years. But the current pace of Japan’s economic growth (1.2% annualized) is only that “high” because the country’s central bank has kept interest rates near zero even in the wake of global inflation.

All this data underscores what most readers of this column already know: The U.S. economy and the U.S. stock market remain the envy of the world. Financially speaking, America is the exception to the rule, which is why many refer to this trend as “American Exceptionalism.”

Some of our exceptional economic strength comes from our culture of innovation. The U.S. has a history of building the best technology companies in the world. California’s Silicon Valley is unrivaled in this regard, although it’s fair to point out many of the founders involved with those companies have been first- or second-generation immigrants.

Several of the other largest economies in the world have governments and regulators that simply make it harder to do (and expand) business. As the saying goes, “America innovates. China replicates. And Europe regulates.” That is oversimplifying things, but the incoming presidential administration is already focused on lowering government regulation and extending tax cuts in the spirit of spurring faster growth. That’s part of the reason many financial professionals expect U.S. markets will continue outperforming international equities in the years ahead.

Another reason U.S. outperformance might continue: The most profitable companies on the planet dominate our stock market. The “magnificent seven” corporations (Apple, Nvidia, Microsoft, Amazon, Alphabet, Meta and Tesla) now make up 33% of the entire S&P 500 by market capitalization (up from 28% a year ago). Through the past decade, the free cash flow of these companies has typically exceeded 20% of sales, which is twice the average cash flow of other S&P 500 companies (around 10%).

In the past two years, these seven stocks have been the rocket fuel propelling portfolios to new heights. Even if we remove Nvidia’s 700% return in the past two years, the other six stocks have averaged a gain of 160% in the same period. Exceptional.

Growth and cash flow are not the only areas to consider when investing, of course. Valuation matters, and international equities are certainly less expensive. The MSCI EAFE index has a forward price-to-earnings (P/E) ratio around 14. The MSCI Emerging Markets index has a forward P/E around 12. Those are both far cheaper than the S&P 500, which has a forward P/E above 22.

It’s possible the environment abroad will become more favorable for non-U.S. stocks. Chinese equities bounced last week following news the Chinese government will embrace a “more proactive” and “moderately loose” monetary policy in 2025, signaling coming rate cuts and other potential stimulus measures.

Stimulus would help, but the truth is such changes will also benefit U.S. corporations that already generate billions in revenue overseas. And let’s not forget that with China there remains legitimate concern for another Trump trade war.

The odds-on bet is that the relative outperformance of American stocks will continue. Having conviction in this outlook might not require any major portfolio repositioning, but it should at least provide some perspective in understanding how fortunate we are to live in and invest in the best economy on earth.

Ben Marks is chief investment officer at Marks Group Wealth Management in Minnetonka. He can be reached at ben.marks@marksgroup.com. Brett Angel is a senior wealth adviser at the firm.