Friday is work day. Now that inflation seems to be under control, it’s good that the nonfarm payrolls report is back as the most important economic indicator. For sellers, things are just like they used to be.
But not all of it. Investors who have been paying attention may have noticed that the U.S. stock market has been underperforming lately, which is not something that has happened very often in recent years.
Hubert de Barochez, a senior economist at Capital Economics, says that the MSCI USA index 984000 -0.16% has lost more than 5% since the middle of June. This is less than half of what the rest of the world ex-U.S. ACWX -1.01% has gained in dollar terms.
De Barochez, who was born in France and now lives and works in London, says there are four reasons for this. The first is that technology stocks, which make up a big part of the U.S. market, have been slow.
The IT sector has dropped more sharply in the U.S. than anywhere else in the world, he says, “though it has been slowly rising again recently.” The communication services sector has also dropped in the U.S. but rose in other places.
The U.S. big tech companies aren’t doing as well as they should because people are worried about the economy slowing down, which makes it hard for them to keep up their earnings growth. This is a problem because, according to de Barochez, many of them were “priced for perfection” until lately.
The second reason is that the U.S. market doesn’t have a lot of financial stocks. These stocks have been rising because the steepening yield curve has made it look like banks will make more money on interest rates and investors are betting on a soft landing for the economy. Only 13% of the U.S. index is made up of financials, but 22% of the ex-U.S. index is.
Third, the value of the U.S. dollar has dropped by 0.40%. “Since the middle of June, the DXY index has dropped by more than 3%, which has helped returns in common currency from stocks in the rest of the world,” says de Barochez. For example, the yen’s nearly 8% rise against the dollar has made Wall Street beat Japanese stocks. This is because the yen has “turned a small drop in the MSCI Japan Total Return Index in Japanese yen terms into a near-7% gain in U.S. dollar terms.”
Lastly, the chart above also shows that the U.S. market hasn’t done as well as it could have. This is partly due to the recent rise in Chinese stocks—the MSCI China index is up almost 30% in dollar terms since mid-June—as investors welcome Beijing’s big, multifaceted stimulus.
Capital Economics thinks that many of these problems will continue to have an effect on Wall Street’s overall performance, with the dollar falling even more, banking stocks rising even more, and Chinese stocks continuing to rise.
But de Barochez is still sure that the U.S. market will win again. He says, “That would be in line with past Fed easing cycles, which have usually been linked to better returns from stocks in the U.S. than those in other countries.”
What’s more, de Barochez says that investors’ excitement about AI will make the stock market bubble bigger. Up until now, most of the excitement around AI has come from tech companies’ big gains and hopes that they will continue to make money. This means that we have not yet reached the level of over-hype that was seen near the height of the dotcom bubble.
“If investors fully come round to our view that AI is a ‘general purpose technology’ (like the steam engine or the internet) that will revolutionize the world economy, those expectations, and in turn equity valuations, could rise even further,” says de Barochet.
“This could provide another significant boost to equities, arguably benefitting those in the U.S. disproportionately” he adds. However, he provides a warning. A possible bursting of the AI bubble in 2026 would see U.S. stocks faring worst.
