The dominance of US equities over the rest of the world is unlikely to abate unless geopolitical and trade policy risks fade, according to JPMorgan Chase & Co. strategists.
US stocks have extended their outperformance against international peers this year, powered by tech shares and the artificial intelligence frenzy, while the economy remains resilient and the Federal Reserve has embarked in an interest-rate cutting cycle amid falling inflation.
“The current phase of polarized regional market performances is likely to extend,” strategists led by Mislav Matejka wrote in a note published Wednesday. “International markets’ multiples do not look demanding, it is the US that remains stretched, but the relative spread could stay elevated for a while longer.”
The S&P 500 has climbed 26% in 2024, making numerous record highs, while the MSCI World Ex-USA Index only returned 3.5%. The valuation gap has also widened, with US stocks now trading at a record 60% premium to international peers based on forward price-to-earnings ratios.
Donald Trump’s election victory has further underpinned the preference for US assets as traders anticipate his policies will ignite global trade tensions. The president-elect already laid out plans for tariffs on imports from Mexico, Canada and China, and Europe could be next.
The JPMorgan strategists noted that there is potential for convergence given the extreme positioning in US stocks, as well the valuation and performance gap against international peers. “However, we continue to believe that one first needs to get more clarity on trade and on geopolitics fronts, before making the switch,” they said.
Strategists across Wall Street have released bullish outlooks for 2025, seeing an extension of this year’s S&P 500 gains as US corporates continue to deliver elevated earnings growth amid resilient economic growth.
Matejka remains cautious on stocks generally for the first half of next year, urging investors to monitor Fed policy, the direction of the dollar, as well as earnings growth forecasts, which he finds too optimistic, especially in Europe.
“The combination of the above, together with elevated geopolitical uncertainty, could mean a more mixed equity performance earlier in the year, as a range of the above pressures are worked through, with recovery thereafter,” he said.
This article was provided by Bloomberg News.