Donald Trump's return may extend US stocks' dominance over global rivals

US stocks are extending their lead over global peers and some investors believe that dominance could grow if President-elect Donald Trump can implement his economic platform without becoming mired in a full-blown trade war or ballooning the federal deficit. 

The S&P 500 has gained over 24 per cent in 2024, putting it well ahead of benchmarks in Europe, Asia and emerging markets.

At 22 times expected future earnings, its premium to an MSCI index of stocks of more than 40 other countries stands at its highest in more than two decades, according to LSEG Datastream. 

Though US stocks have outperformed their counterparts for more than a decade, the valuation gap has widened this year thanks to resilient economic growth and strong corporate earnings - particularly for the technology sector, where excitement over developments in artificial intelligence have boosted the shares of companies such as chipmaker Nvidia. 

Some market participants believe Trump's agenda of tax cuts, deregulation and even tariffs can further fuel US

exceptionalism, outweighing worries over their potentially disruptive nature and inflationary potential. 

"Given the pro-growth tendencies of this new administration, I think it's tough to fight the battle against US equities, at least in 2025," said Venu Krishna, head of US equity strategy at Barclays. 

Signs of a growing US bias were evident immediately after the Nov. 5 election, when US equity funds received more than $80 billion in the week following the vote while European and emerging market funds saw outflows, according to Deutsche Bank. 

Strategists at Morgan Stanley, UBS Global Wealth Management and the Wells Fargo Investment Institute are among those who recommend overweighting US equities in portfolios or expect them to outperform next year. 

Earnings Engine

A critical driver of US strength is corporate America's profit edge: S&P 500 company earnings are expected to rise 9.9 per cent this year and 14.2 per cent in 2025, according to LSEG Datastream. 

Companies in Europe’s Stoxx 600, by contrast, are expected to increase earnings by 1.8 per cent this year and 8.1 per cent in 2025.

"The US continues to be the geographic region of the world that generates the highest earnings growth and the most profitability," said Michael Arone, chief investment strategist at State Street Global Advisors. 

The dominant role of massive technology companies in the US economy and their heavy weightings in indexes such as the S&P 500 are helping drive that growth. The five largest US companies - Nvidia, Apple, Microsoft, Amazon.com and Alphabet - have a combined market value of more than $14 trillion, compared with roughly $11 trillion for the entire STOXX 600, according to LSEG data. 

More broadly, the US economy is expected to grow by 2.8 per cent in 2024 and 2.2 per cent in 2025, compared with 0.8 per cent this year and 1.2 per cent next year for a group of about 20 countries using the euro, according to forecasts from the International Monetary Fund. 

Trump's plans to raise tariffs on imports could help the US extend that advantage, despite the risk of some blowback, said Mike Mullaney, director of global markets research at Boston Partners, who favors US stocks. 

"If Trump throws on a 10 per cent to a 20 per cent tariff on European goods, they're going to get hurt more on a relative basis than we are," Mullaney said. 

Republicans' lock on power in Washington - which could make it easier for Trump to enforce his agenda - prompted Deutsche Bank's economists to raise their 2025 US growth forecasts to 2.5 per cent from 2.2 per cent. 

While tax cuts and deregulation are expected to boost growth, relatively tight margins in US Congress and the administration's sensitivity to market reactions could limit the scope of the most 'extreme' policies, such as tariffs, the bank wrote on Thursday. 

Analysts at UBS Global Wealth Management, meanwhile, expect the S&P 500 to hit 6,600 next year, driven by advances in artificial intelligence, lower interest rates, tax cuts and deregulation. The index closed at 5,948.71 on Thursday. 

Still, an all-out trade war with China and other partners could hit US growth and stoke inflation. A scenario in which countries retaliate against far-reaching US tariffs could send the S&P 500 to as low 5,100 - though global stocks would also decline, UBS said. 

Certain corners of the market could be particularly vulnerable to Trump's policies: worries over plans for cutting bureaucratic excess bruised shares of government contractors last week, for example, while drugmakers fell when Trump picked vaccine skeptic Robert F. Kennedy Jr. to lead the Department of Health and Human Services. 

Broad tax cuts could also spark concerns about adding to US debt. Deficit worries have helped drive a recent selloff in US government bonds, taking the 10-year Treasury yield to a five-month high last week. 

At the same time, the valuation gap between the US and the rest of the world could become so wide that US stocks start looking expensive, or international equities become too cheap to ignore. 

For now, however, the long-term trend is in favor of the US, with the S&P 500 gaining more than 180 per cent against a rise of nearly 50 per cent for Europe's STOXX over the past decade. "Momentum is a great thing," said Colin Graham, head of multi-asset strategies at Robeco. "If you've got something that keeps outperforming, then investors will follow the money."

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