International equities are beating U.S. stocks in ‘rare’ outperformance. Should you lighten up on non-U.S. equities?

Shares of the iShares MSCI ACWI ex U.S. ETF
ACWX,
which tracks a broad range of international- developed- and emerging-market companies while excluding U.S. stocks, has risen around 10% over the past 12 months through Tuesday. The S&P 500 is up 8.3% over the same period, according to FactSet data.

But looking over a longer time horizon, U.S. stocks have widely outperformed.

“The difference is dramatic,” said Colas. And “it’s not just Big Tech creating the performance difference.”

The chart below tracks the performance of the MSCI ACWI ex US index versus the S&P 500, a gauge of large-cap U.S. equities, and the U.S. small-cap-stocks-focused Russell 2000 index
RUT.

Non-U.S. stocks have returned an aggregate 10% on a price basis since 2010, according to the DataTrek note. But U.S. stocks had far stronger performance over the same period, with the S&P 500 returning 269% while the Russell 2000 gained 162%, the note says.

“One might assume that non-US stocks must occasionally have their moments in the sun, and that is true, but those periods are very brief indeed,” said Colas. 

Based on trailing 250-day relative returns between the S&P 500 and the MSCI All Country World ex-US index since 2009, DataTrek found “there was one period of strong non-US equity outperformance in 2009.” That was off March lows that year in equities globally, he said.

“Since then, there have been 5 periods where non-US stocks have beaten the S&P over a calendar year,” wrote Colas. “Only one – 2017 – lasted longer than a few weeks.”

The U.S. equities market has “a heavy and increasing dose of Big Tech” stocks that have been “outsized winners” since 2010, while also benefiting from the dollar
DXY
as the world’s reserve currency and “American companies’ relentless focus on profitability,” according to DataTrek. 

“There is no Apple
AAPL,
+0.28%
or Microsoft
MSFT,
+0.24%
or Amazon
AMZN,
+0.29%
of Europe or Japan,” said Colas. “There are similar companies in China, but their scope has thus far been limited to that country.”

Meanwhile, the U.S. dollar’s reserve-currency status allows the country “to borrow more than European economies and sustain higher levels of economic growth,” according to DataTrek.

The research firm expects U.S. stocks can continue beating the rest of the world’s equities over the long run, partly because the country is “best positioned to leverage” the trend of technology being important to economies globally.

“As for American business’ profits-first mentality, if anything it has grown stronger in the last year or two,” Colas said. And “we do not see an alternative reserve currency springing up any time soon.”

Read: Why U.S. dollar is at no ‘meaningful risk’ of losing status as the world’s reserve currency, despite challenges from China, says Wells Fargo

Investors may want to consider taking some profits from international stocks, according to DataTrek.

“Now is a good time for long-term investors to cycle out of non-U.S. equities, given that they have recently outperformed,” he said. “Periods of non-U.S. stock outperformance are rare and don’t last very long.”

Turning point?

Goldman Sachs Group said in a global macro research note dated Oct. 30 that the U.S. has seen an “exceptional decade,” with its growth and equities outperforming while “the dollar’s global role remains unchallenged.” 

While the note questioned whether the outperformance was at a “turning point,” it also said that Goldman’s equity strategists David Kostin and Lily Calcagnini expect U.S. stocks can keep outperforming over the longer term. That’s “despite their view that stretched U.S. valuations will impede outperformance over the coming year.”

The biggest driver of “superior” returns for U.S. stocks over the past decade was “management focus on shareholder value creation, though a larger exposure to tech companies and greater U.S. index dynamism also played important roles,” in the view of the Goldman strategists. 

The note says Kostin and Calcagnini expect these factors “should keep U.S. stocks outperforming over the longer run and may lead investors to regret their decision to allocate more money toward non-U.S. vs. U.S. equities this year.”

October slump

U.S. stocks closed higher on Tuesday, the last day of October, ahead of the outcome of the Federal Reserve’s two-day policy meeting. The Dow Jones Industrial Average
DJIA
finished with a 0.4% gain, while the S&P 500
SPX
climbed 0.6% and the technology-heavy Nasdaq Composite
COMP
rose 0.5%, according to Dow Jones Market Data.

Fed Chair Jerome Powell will host a press conference on Wednesday after the central bank announces its decision on where it’s setting its benchmark interest rate as it battles elevated inflation. A recent jump in rates in the Treasury market has hurt U.S. stocks, with the Dow, S&P 500 and Nasdaq all slumping in October to book a third straight month of declines. 

The iShares MSCI ACWI ex U.S. ETF also logged losses in October, notching a third consecutive monthly drop, FactSet data show.