Some investors are confident that the U.S. stock market will continue to do better than other global benchmarks because the U.S. economy is stronger than the rest of the world’s since the pandemic.
However, some economists disagree. They say that the fact that the U.S. stock market is currently dependent on the AI boom is a risk that could cause U.S. stocks to fall back to where they belong in the global market if the AI “bubble” pops.
A group of economists led by Neil Shearing, group chief economist at Capital Economics, said in a Monday note that they think stocks in the U.S. will do better than those in the rest of the world over the next 18 months because of “a bubble fueled by enthusiasm about artificial intelligence (AI) inflates,” which will help the U.S. stock market more than others.
But economists don’t think the stock market will keep going up forever because they think the AI bubble “will eventually burst,” which will end the U.S. stock market’s run of good performance.
Since the global financial crisis in 2008, U.S. stocks have done much better than those in other countries. For example, the MSCI USA Index PBUS has gone up more than 300% in the last 16 years, while the MSCI World ex USA Index ACWX has only gone up 57.6% during the same time period.
According to Shearing and his team, the main reason why U.S. stocks have done better since 2008 has been “a more rapid rise” in earnings per share (EPS) and valuations for U.S. stocks. This is because faster-growing industries like IT and AI have helped U.S. stocks do well. They also said that a stronger dollar (DXY) has hurt equity returns in countries other than the U.S.
But once “the dust settles” after the AI bubble bursts, most of the things that pushed up U.S. stocks will no longer be as important, according to economists. This means that U.S. stocks will give “similar returns” to stocks in other countries.
Still, Shearing and his team didn’t think that the end of the AI bubble would have any “lasting impact” on the U.S. economy. They remember that when the dot-com bubble burst in the early 2000s, the U.S. economy was still the strongest in the world.
“Even if U.S. stocks kept underperforming, it would take a huge change for the U.S. stock market to be surpassed in size,” Capital Economics said. “The fundamental reasons for U.S. dominance are too strong to be upset by a bout of irrational exuberance once in a while.”
Early Monday afternoon, U.S. stocks were slowly going up as the tech-heavy Nasdaq Composite COMP tried to build on records set last week. Statista says that the Nasdaq was up 1.2% and on track for its longest winning streak since January. The S&P 500 SPX was also up 1%, and the Dow Jones Industrial Average DJIA was up 0.6%.
