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We have the largest gross domestic product (GDP) in the world. We have the most powerful military, according to the Global Firepower Index. And we have a track record of topping the podium at the Olympics more than any other country.
But the old U.S. of A. has been stripped of that No. 1 status in one area: the stock market.
Last year, after a decade of consistently outperforming the rest of the world’s stock markets, U.S. stocks are no longer in the top 10, or even the top 20. In fact, they’re No. 35 – because 34 international markets had better returns last year.
See for yourself.
If you go down the list of markets in order of equity return in 2022, you may be surprised to learn which ones outdistanced the mighty S&P 500.
Turkey supplanted the U.S. for the top spot, with a stock market that soared 91% in 2022. South American markets took the silver and the bronze, with Chile up more than 20% and Brazil up more than 10%.
To be fair, most stock markets did lose ground last year, as you can see above. But even most of the losers fared far better than the S&P 500, which was down 18% in 2022.
And while the S&P 500 has turned around this year, clocking a 6% gain in January, that 6% gain isn’t enough to erase the losses of last year — and other markets have continued to widen the gap by making bigger gains.
If you think this change in the stock-market hierarchy is just a one-year anomaly, think again. International stocks outperforming U.S. stocks may be a trend that sticks around awhile.
Trading PlacesThe global stock market performance derby moves in big, long-term cycles. U.S. stocks outperform for years at a time, then international stocks take over for the next several years.
Over the past few months, this trade-off has been taking place.
The chart above shows the relative performance of U.S. and global stocks. When the line moves up, U.S. stocks are posting the best performance. And when the line moves down, global stocks have the upper hand.
You can see from the steady upward slope that U.S. stocks had been outperforming the rest of the world since 2008, to a degree we’d never seen before. U.S. stocks, driven mostly by the performance of a handful of Big Tech stocks, absolutely crushed global stocks in recent years.
But they got a bit too far ahead of themselves. And now the tides are turning.
In the chart above, you can see previous turning points like this highlighted in red. After those turns, global stocks went on to outperform U.S. stocks by a wide margin and for many years at a time.
So while U.S. stocks have gotten off to a hot start this year, the stock markets of many smaller countries are expected to continue outpacing those gains in the long term, as I’ll show you below.
Getting More Than What You Pay ForTwo huge fundamental factors are driving the current turn in performance: valuation and profit expectations. First, global stocks are dirt cheap right now compared to U.S. stocks. European stocks, for example, are trading with a forward price-to-earnings ratio (P/E) of just 12.2x expected earnings. U.S. stocks are trading with a forward P/E of nearly 18x.
That’s more than a 30% discount in favor of cheaper European stocks. Emerging markets are cheaper still, with a forward P/E of just 11.2x, a 37% discount.
Second, not only are global stocks cheaper than U.S. stocks, but they’re also growing profits faster.
When you buy stocks at “fair value,” you usually get roughly what you pay for. But with global stocks, especially emerging markets, you’re getting far more than you pay for right now. That’s because global stocks are expected to deliver much stronger profit growth this year than U.S. stocks.
As we’ve already seen, U.S. stocks trade at rather lofty valuations, but what kind of growth are you getting for the high P/E? In the U.S., not much.
U.S. stocks grew profits about 6% last year, but earnings are expected to grow just 4.7% in 2023. With a P/E of nearly 18x and earnings growth of less than 5%, that just isn’t a very good deal.
Many European stock markets, by contrast, are forecast to deliver much stronger profit growth this year: 18.9% in Portugal, 19.9% in the Netherlands, and a whopping 34.9% in Finland.
In emerging markets, it’s the same story, only better because of even cheaper valuations.
India should deliver 18.5% profit growth in 2023. Hong Kong earnings should grow 28% this year, and in Greece, you can expect 42% profit growth.
And yet Hong Kong stocks have a forward P/E of just 12.8x currently. And Greek stocks trade at just 10.2x this year’s profit estimate. For my money, that looks like an incredible bargain.
Bottom Line: Too many investors suffer from nearsightedness when it comes to investing globally. In the business, we call this “home country bias.”
It’s just a bit beyond most investors’ comfort level to consider investing their hard-earned money in Portugal, Hong Kong, or Greece — even if they like the idea of vacationing in those exotic destinations.
But don’t ever forget that there is a wide world of investment opportunities outside the S&P 500. And it often pays to consider global stocks over ones listed in the U.S. Right now, you are getting much more than you pay for in select global stock markets.