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Weekly Market Analysis - Equities - Discreet Repricing vs Lasting Growth
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Returns Can Be Positive Across Global Equities
Movements in currencies are a zero-sum game of “winner vs loser.” Equity returns, in contrast, can be positive across most of the world together as the economy is able to produce more goods and services over time.
Can US Equities Keep Growing at its Current Pace?
Global markets shifted in favor of US assets in the aftermath of the November 5 election. The US dollar has risen 3% against liquid, tradeable currencies. Non-US equity markets have fallen while US equities have risen 3% since election day. While this has fit our tactical allocation preferences favoring US assets (please see our November 9th CIO Bulletin), we have to question how much “exceptional growth” is now priced in.
USD may Peak but Equities Rally Could Continue
If we look at the November 2016 election as a guide, the dollar’s increase was discrete, peaking in less than two months.
While trade wars and a Fed tightening cycle drove volatility in 2018, both US and non-US equities posted solid positive returns from Trump’s 2016 election to the end of 2019 (60.7% for the US, 35.7% for non-US).
Summary
With just eight trading days since US election results, the market value of US equities has increased US$2 trillion, or 3%. The US dollar has gained 3% against an index of the most liquid, traded currencies. Measured in the now appreciated US dollar, share prices outside the United States have fallen 2.9% or about US$750 billion.
As we’ve highlighted many times, EPS declined for many firms in 2022-2023 while labor markets were strengthening. Excluding the Magnificent 7 large-cap US tech related firms, EPS was down roughly 7% for other S&P 500 firms and for non-US firms in 2023 (see chart). This makes 2024 only the mere starting point for a profit rebound.
Portfolio considerations
US equity valuations have risen to 21.8X consensus EPS estimates for 2025 while non-US are 13.3X. As discussed last week, we are quite comfortable with our overweights in small- and mid-cap US growth stocks, but believe large caps are more fully valued for positive outcomes in the economy. In looking at comparisons to the first Trump administration, tariff friction didn’t impact global markets until 2018. The new Trump administration may act much faster in the coming year. Even so, the drop in trade-sensitive regions suggests a good deal of concern has been priced in. US bank shares are most likely to benefit from de-regulation and normalization of the US yield curve. While they have gained 9.7% since November 5, the same group gained 25.6% in the first six months following the 2016 election.
Source: Bloomberg, Nov 15 2024. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees, or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
Returns Can Be Positive Across Global Equities
In essence, the slogan “America first” played out in global markets over the past week. Even the value of gold has withered a bit against the mighty greenback (-6.5% since election day). In contrast, hopes of de-regulation and adoption in a Trump administration have sent cryptocurrencies higher.
Changes in the value of a currency vis-à-vis another is a zero-sum game of winner versus loser. The same is not true for equities. Fiat currencies generally “inflate away,” losing value in their purchasing power of goods and services over time. But over time, the economy is able to produce more goods and services as technology improves and contributes more, while an expanding human population works more hours. Therefore, owning the productive capital of the economy can generate sustained returns, theoretically in perpetuity.
Could the worst already be over for global shares, scared by 2018 trade war memories and campaign promises of dramatically higher tariffs? We wouldn’t want to share false confidence. History, however, suggests that markets have done much of the work already. Outside of the US, local returns have been flat or negative in all the large regional markets save Canada.
Can US Equities Keep Growing at its Current Pace?
The share price gains from the 2016 election through 1H 2017 suggests promise. For example, in that six-month period, banks gained far more than they have in the past few weeks. As discussed in last week’s CIO Bulletin, to the extent that Fed rate cuts steepen the US yield curve, it generates improved economics for lenders. Expectations of deregulation have already boosted large bank share prices, but the gains have come on low valuations and severe underperformance for nearly two decades.
USD may Peak but Equities Rally Could Continue
A return to “trade wars” can introduce new volatility in markets in 2025, but when looking at the full period to the end of 2018, global markets still came out with solid gains. This was far broader than the US even with the trade friction period of 2018 and the Fed tightening cycle that preceded the pandemic.
As our Global Investment Committee meets in the coming week, we have to ponder the large rise in US shares and slump elsewhere in the world. As we noted last month in the CIO Bulletin, the divergence in valuation between US and non-US shares (22.9X vs 13.3X next year’s estimated EPS) is at an extreme. It reflects different growth rates of corporate profits, with the US growing faster, gaining share relative to the rest of the world, US market cap has been gaining even faster.
If not for the prospect of a quick resumption of trade friction and a somewhat firmer rate outlook, the case for increases in non-US equity allocations would be clear. But then again, if not for US election-driven factors, many non-US markets would likely already be higher.
