Developed non-US equities have finally ended US stocks’ record run of dominance. Up until December of last year, US firms had outperformed non-US developed stocks for four consecutive calendar years and in 55 consecutive rolling 12-month periods.1
Over those 55 periods, the US cumulatively outperformed non-US by 57%.2 And because US stocks were the leading exposure over developed ex-US and emerging markets (EM), globally diversified portfolios lagged those built with more of a home bias.
That’s changed. Non-US stocks outperformed the US by 6.7% in December and almost 2% in January. With momentum, sentiment, and valuations as catalysts, non-US stocks likely will hang onto their leadership position for a few more periods.
Short-term return trends have strengthened significantly for non-US stocks. Over the past three months, non-US has beaten US by 7.5%, this ranks in the 90th percentile back to 1971.3
In fact, the rolling three-month excess return figure has been positive for 70 consecutive days — the longest stretch of continuous outperformance since 2017 when non-US stocks went on an 81-day run. The difference is that today’s average excess return has been much larger (+9.9%, compared to just 2.2%).4
Our Chart Pack regional momentum scorecard shows academically constructed short-, intermediate-, and-long-term-momentum indicators also favor non-US over US. See the table below.
In all periods, (three-, six-, and 12-month momentum), international developed (MSCI EAFE) has better figures than the US. European markets have the strongest figures on a three- and six- month basis. As European strength pushes broader non-US markets momentum, it’s notable that more than one country/segment is driving returns.
Non-US Markets Rank High on Multiple Momentum Metrics
Looking at continuous momentum (or frog-in-the-pan momentum) that measures the number of days with positive returns over a lookback period, non-US markets once again have stronger figures than the US (51 to 38 over a 90-day lookback and 86 to 80 for a 180-day lookback).5
For momentum investors, the signal for developed non-US markets has turned green.
Recent earnings sentiment trends between the two regions provide a simple rationale for stronger price returns for non-US stocks versus the US markets.
Over the past six months, all major regions have witnessed downside revisions to 2023 earnings-per-share (EPS) estimates, led by EM, which had its growth revised down from a positive 6% to a negative 4% (reason enough to be cautious on EM’s short-term momentum trends).6
But non-US stocks have seen the shallowest declines, falling from 3.8% to 1.4%, as the US fell from 7.8% to 2.39%.7 And while the US’s 2.39% ranks as the highest projected growth rate among the three major areas, it has fallen monotonically every month in the past three- and six-month periods.
Conversely, 2023 EPS figures for non-US developed stocks have improved every month over the past three months. Not surprisingly, given the strong momentum trends, European markets have witnessed greater upward earnings revisions as well.
While there are still more downgrades than upgrades (ratio less than one), non-US developed stocks up-to-down ratio is the strongest among all major regions, supported by strong trends in Europe and Japan.
2023 Earnings Growth Revised Upward for Non-US Stocks in Past 3 Months
What’s driving stronger relative earnings momentum outside the US? A simplistic rationale is that lower gas prices have eased stagflation worries in Europe, while improving aggregate demand. Additionally, China’s re-opening has boosted growth optimism for regions close to China. This divergence is visible in economic releases as well, as Citi Eurozone and Global Economic Surprise Indices have turned positive, while the US’s figure is negative.8
Add earnings sentiment to momentum as a tailwind for non-US developed stocks.
The improving earnings sentiment and burgeoning trend of stronger price returns to start the year occurring alongside constructive valuations.
To start 2023, non-US developed stocks next-12 -month-price-to-earnings ratio (NTM P/E) relative to global equities, was in the bottom 3rd percentile. Meanwhile, US markets were in the upper 90th percentile.
Fast forward one month and those valuation rankings have not changed. In fact, based on price-to-earnings (P/E) and price-to-book (P/B) ratios, non-US trades below the 20th percentile, on a relative basis to global stocks. Alongside the low NTM P/E rating, that’s three out of the four metrics we track in the lower 20th percentile. Meanwhile, US stocks trade above the 75th percentile across all three, as shown below.
Now More Value Overseas than in the US
Only on price-to-sales (P/S) does the US rank better than non-US stocks. But that is only at the broad level, as Japan, Germany, Canada, and the UK all have lower P/S figures. Yet, for the US, there is some value down the cap spectrum, as we noted in our 2023 Market Outlook.
Big picture? Despite the strong returns, there is broad valuation support for non-US stocks and the cheap relative valuations are not a result of weak growth (i.e., value traps).
Non-US stocks have strong price momentum and improving earnings estimates, but they are also trading at valuations that screen as attractive to the rest of the world.
This indicates that the recent strength we have witnessed may have more room to run, as frothy valuations are unlikely.
Crowding fears also remain unfounded. My latest ETF investor sentiment report showed that while non-US equity flows have outpaced US equity flows over the past three months, the US still dominates on a three-to-one over the past 12 months. Investors have only started to warm up to the idea of allocating back to, or increasing, exposure to equity markets outside the US.
When non-US last broke a prolonged trend of underperformance to the US in 1999, foreign equities went on to outperform in ten out of the next 11 rolling 12-month periods. While past performance is not a reliable indication of future performance, non-US markets have now notched two consecutive periods of positive 12-month excess returns, and momentum, sentiment, and valuations all support this new leadership position.
For investors who don’t already have exposure to these markets, now may be the time to take a closer look at our available strategies.
1Based on the performance of the MSCI EAFE Index and the S&P 500 Index between April 2018 and November 2022 per Bloomberg Finance L.P.
2Based on the performance of the MSCI EAFE Index and the S&P 500 Index between April 2018 and November 2022 per Bloomberg Finance L.P.
3Based on the performance of the MSCI EAFE Index per Bloomberg Finance L.P.
4Based on the performance of the MSCI EAFE Index per Bloomberg Finance L.P.
5Based on the performance of the MSCI EAFE Index and the S&P 500 Index per Bloomberg Finance L.P.
6Based on consensus analyst estimates for the MSCI EAFE Index, S&P 500 Index, and MSCI Emerging Markets Index per FactSet.
7Based on consensus analyst estimates for the MSCI EAFE Index, S&P 500 Index, and MSCI Emerging Markets Index per FactSet.
8Based on Citi Economic Surprise Indices per Bloomberg Finance L.P.
MSCI ACWI Index
Market-capitalization-weighted stock market index that measures the stock performance of the companies in developed and emerging markets.
MSCI EAFE Index
Market-capitalization-weighted stock market index that measures the stock performance of the companies in developed markets – excluding the US and Canada.
MSCI Emerging Market Index
Market-capitalization-weighted stock market index that measures the stock performance of the companies in emerging markets.
S&P 500 Index
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
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