The near-10% correction in the S&P 500 Index and even larger drawdown in the Nasdaq have gotten a lot of attention this year. What hasn’t gotten as much attention—and maybe surprising to some—is the relative resilience in equity markets outside the U.S. In our special Winter Olympics edition of the Weekly Market Commentary, we hand out medals to the U.S., developed international and emerging markets. Who do we think will get the gold? Read on to find out.

U.S. Has Been Skiing Uphill
It’s been a rough start to the year for U.S. stocks with some stiff headwinds. The path of the S&P 500 in January looked like something Mikaela Shiffrin might ski on given the steepness of the decline with twists and turns. Fears that the Federal Reserve (Fed) might be behind the curve in its inflation battle got most of the blame for the market selloff, while a few high-profile earnings misses—Meta (Facebook) being the latest—have added to investors’ anxiety levels.

Meanwhile, the international equity markets have held up relatively well. The S&P 500 Index is down 5.6% year to date, outrun by the 3.8% and 0.9% declines in the MSCI EAFE Index (developed international equities) and the MSCI Emerging Markets (EM) Index. To assess which regional market might come out on top at the end of the 2022 competition, we take a look at global fundamentals, valuations, and technicals.

Economic Growth Likely To Be A Close Race
Starting with economic growth outlooks, emerging markets may produce the fastest gross domestic product (GDP) growth in 2022, but it could be a close finish [Figure 1].

China’s zero-Covid-19 policy may delay the restoration of the EM growth premium while we wait for an eventual end to the pandemic. Meanwhile, distressed property developers present a headwind to growth, though monetary stimulus is helping turn the tide some in China in the near term.

We expect developed international and U.S. economies to generate similar growth in 2022, though rising forecasts for Japan are encouraging. Europe may also see more benefit from pandemic-related pent-up demand, as the region is earlier in its economic cycle than the U.S. And U.S. growth has gotten off to a slow start in the first quarter because of the Omicron variant.

U.S. The Clear Favorite In The Earnings Event
The U.S. comes into 2022 as the earnings favorite. Consensus estimates are calling for a 9% increase in S&P 500 earnings this year, ahead of the 5% and 7% increases expected for developed international markets and EM, respectively. As shown in Figure 2, U.S. earnings estimates have marched steadily higher over the past year, outpacing the increases outside of the U.S.

While it’s tempting to think EM will generate better earnings growth because economic growth is better, EM companies have had a difficult time translating economic growth into profits over the past decade (certainly part of the reason why valuations are low in EM, as discussed below). In addition, China’s regulatory crackdown still presents earnings risk even though the headlines have settled down.

On the flip side, the recent increase in EM earnings estimates for 2022 is encouraging (2.7% over the past month, compared to 1.5% for the U.S. and 2.3% for developed international). So while we consider EM an earnings underdog in 2022 and consider it more of a show-me story, it’s only a small hit to its medal hopes.

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