Why one foreigner expects the U.S. to reclaim its stock-market dominance

By Jamie Chisholm

Past Fed easing cycles have historically been associated with stronger returns from equities in the U.S., analyst says

It's jobs Friday. With inflation apparently back under control it's good to have the nonfarm payrolls report reclaiming its spot as leading economic data point. Thing's are nicely how they used to be for traders.

But not everything. Observant investors may know that the U.S. stock market has been enduring a period of underperformance - a fairly unusual phenomenon relative to the action of recent years.

Hubert de Barochez, senior markets economist at Capital Economics, says that since mid-June the MSCI USA index XX:984000 has returned less than 5%, which is half as much as the rest of the world ex-U.S. ACWX in dollar terms.

A French native who works in London, De Barochez says there are four reasons for this. First, is that technology stocks, which account for such a relatively large share of the U.S. market, have lagged.

"While it has bounced back a bit recently, the IT sector has fallen more sharply overall in the U.S. than in the rest of the world, and the communication services sector has fallen in the U.S. but risen elsewhere," he says.

Part of why the U.S. big tech underperformance is that economic slowdown concerns have put into question the sustainability of their earnings growth - a problem considering many were "priced for perfection" until recently, according to de Barochez.

The second reason is that the U.S. market has a relatively low exposure to financial stocks, which have been rallying as the steepening yield curve has improved prospects for banks' interest margins and investors bet on a soft economic landing. Financials make up just 13% of the U.S.A. index but 22% of the ex-U.S. index.

Third is the depreciation of the U.S. dollar DXY. "The DXY index has fallen by more than 3% since mid-June, which has provided a boost to returns in common-currency terms from equities in the rest of the world," says de Barochez. Wall Street's underperformance relative to Japanese shares, for example, has been powered by the yen's near 8% jump versus the buck "turning a small drop in the MSCI Japan Total Return Index in Japanese yen terms into a near-7% gain in U.S. dollar terms."

Finally, as the chart above also shows, the U.S. market's relative underperformance has been partly caused by the recent surge in Chinese shares - the MSCI China index is up nearly 30% in dollar terms since mid-June - as investors welcome the large multi-pronged stimulus from Beijing.

Capital Economics reckons many of these issues will continue to impact Wall Street's relative performance, with the dollar weakening more, financials rallying further and Chinese stocks extending their bounce.

However, de Barochez still thinks the U.S. market will retake the lead. "That would be consistent with past Fed easing cycles, which have historically typically been associated with stronger returns from equities in the U.S. over those elsewhere," he says.

More importantly, de Barochez says that investor enthusiasm about AI will revive and fuel a bubble in the stock market. To date, the excitement around AI has been mostly underpinned by strong profits from technology firms and expectations of future earnings growth. In other words we have yet to reach the over-hyped environment witnessed near the peak 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.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are little changed as benchmark Treasury yields BX:TMUBMUSD10Y hold steady ahead of jobs data. The dollar index DXY is a fraction lower, while oil prices (CL.1) climb and gold (GC00) is trading around $2,658 an ounce.

   Key asset performance                                                Last       5d      1m     YTD     1y 
   S&P 500                                                              5699.94    -0.79%  3.57%  19.50%  33.86% 
   Nasdaq Composite                                                     17,918.48  -1.49%  4.62%  19.37%  35.54% 
   10-year Treasury                                                     3.853      9.90    14.00  -2.79   -95.10 
   Gold                                                                 2677.6     -0.12%  5.97%  29.24%  44.97% 
   Oil                                                                  74.41      8.41%   9.17%  4.32%   -10.14% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor's Business Daily.

The buzz

The September nonfarm payrolls report will be published at 8:30 a.m. Eastern. Economists forecast that a net 150,000 jobs were added, up from 142,000 in August. The unemployment rate is expected to remain at 4.2%, while month-on-month hourly wages will grow 0.3% against 0.4% in August.

New York Fed President John Williams will give opening remarks at NY Fed event at 9:00 a.m. Austan Goolsbee, the Chicago Fed president, will make appearances on Bloomberg at 10:00 a.m., Yahoo! Finance at 10:30 a.m., and Meet the Press at 4:00 p.m.

A U.S. dockworkers union agreed to suspend its port strike until January 15 after reaching a tentative deal. Shares of European shipping groups fell sharply in response.

Spirit Airlines (SAVE) is reportedly in talks over a bankruptcy filing.

Shares of Rivian Automotive (RIVN) are down 8% in premarket trading after the electric vehicle maker said it was experiencing a supply shortage, prompting a cut to its full-year production guidance.

U.S. WTI crude futures (CL.1) rose above $75 a barrel for the first time in more than four weeks as concerns rose that Israel may attack Iran's oil industry.

The European Union voted on Friday to impose tariffs as high as 45% on electric vehicles from China.

Best of the web

A big Russia bet is minting fortunes on paper for retail investors.

How fentanyl traffickers are exploiting a U.S. trade law to kill Americans.

This teenage hacker became a legend attacking companies. Then his rivals attacked him.

The chart

Fretting about overall car demand and better-than-forecast but nevertheless poorly-received delivery numbers have contributed to a tough few days for Tesla shares. "But this volatility is not all that unusual in the context of its current trend since early August," says Mark Newton, head of technical strategy at Fundstrat. He doesn't expect a further decline ahead of Tesla's robotaxi event on October 10.

"Over 251.16 on a close should be important, and any further decline likely finds strong support between 235-239 into early next week before turning back higher," he concludes.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   NIO     NIO 
   GME     GameStop 
   PLTR    Palantir Technologies 
   HOLO    MicroCloud Hologram 
   AMZN    Amazon.com 
   AAPL    Apple 
   BABA    Alibaba 
   TSM     Taiwan Semiconductor Manufacturing 

Random reads

Bigfoot chillin' in the woods.

A group of seniors re-created a series of pop album covers.

Week in wildlife in pictures: bears caught in the act, a glamorous seal and a fugitive emu.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Check out On Watch by MarketWatch, a weekly podcast about the financial news we're all watching - and how that's affecting the economy and your wallet. MarketWatch's Jeremy Owens trains his eye on what's driving markets and offers insights that will help you make more informed money decisions. Subscribe on Spotify and Apple.

-Jamie Chisholm

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

10-04-24 0703ET

Copyright (c) 2024 Dow Jones & Company, Inc.