Nov 2, 2023, 11:57 AM ETOther

Is US outperformance at a turning point?

The past decade has seen U.S. equities, the dollar, and GDP growth consistently outperform other developed and emerging markets.
Rebecca Patterson (Bridgewater) notes that market outperformance often follows a decade-long cyclical pattern, citing the 1999–2000 tech bubble and the subsequent 2000s BRIC outperformance.
The 2010s U.S. outperformance was driven by a regime of subdued growth, low inflation, and low interest rates (the "Great Moderation"), which favored organic growers like technology.
U.S. equities outperformed in 11 of the last 13 years, a trend largely fueled by the dominance of the technology sector.

Patterson expects another decade of U.S. outperformance, driven primarily by generative AI and broader technological advancement.
Domestic growth accounts for approximately 40% of total equity performance over 10–15 year periods; AI is expected to drive productivity similarly to the personal computer revolution.
Deteriorating global demographics are increasing the relative importance of productivity gains, which the U.S. is best positioned to capture through technology.
The U.S. equity index holds more than double the technology weight of non-U.S. peer indices, providing a structural advantage in a low-cyclical-growth environment.
U.S. tech leadership is supported by:
- A critical mass of cash-rich "magnificent seven" companies (e.g., Nvidia, Microsoft, Amazon).
- A government policy environment that encourages tech innovation, contrasting with China's growing skepticism of large private tech firms.
- A secondary education system capable of producing a tech-savvy workforce.
Valuations are high, but historical precedents (e.g., the 1956 Federal Highway Act, 1980s defense spending) suggest that structural economic shifts can sustain outperformance for years even after initial price discoveries.

Jean Boivin (BlackRock) acknowledges U.S. exceptionalism but warns that the next 5–10 years present higher uncertainty due to three structural "mega forces."
The current macro regime differs fundamentally from the 40-year "Great Moderation" era (pre-2020) characterized by steady production capacity growth.
The first mega force is demographics: An unprecedented wave of aging into retirement acts as a binding constraint on the U.S. labor supply.
The second mega force is the rewiring of globalization, which introduces geopolitical challenges and questions regarding the long-term appeal of U.S.-denominated assets.
The third mega force is the transition to a low-carbon economy, altering the global energy mix and production capacity.
These shifts suggest an adjustment to lower trend growth, with the U.S. economy effectively experiencing "stagnation" over the last 18 months rather than resilience.
A "resetting of rates" is occurring, moving away from the ultra-low rate environment of the post-2008 era.
Demographic pressures may reverse the long-term decline in the labor share of income, increasing employee bargaining power and creating a headwind for corporate profits.

Peter Oppenheimer (Goldman Sachs) identifies three unusual conditions that fueled the last decade of U.S. outperformance:
- An unprecedented global decline in interest rates and quantitative easing, which boosted long-duration assets.
- Structural headwinds in traditional industries (banks, commodities) that were more prevalent in non-U.S. markets.
- Remarkable growth and re-rating of the U.S. technology sector, which grew from ~10% to ~25% of market capitalization.
Oppenheimer argues these conditions are fading:
- Interest rates are significantly higher and unlikely to return to post-2008 lows, removing a key driver of revaluation.
- Traditional industries have recovered, with improved capital positions and returns, eliminating the relative outperformance of U.S. tech.
While the technology sector remains a significant U.S. differentiator, its current valuations are lower than previous bubble periods.
Profit growth differentials have narrowed significantly post-2020; European profits annualized at ~11% versus 8% for the S&P, contrasting with the 0% vs. 5% split during the 2010s.
The market is shifting toward a "fat and flat" structure with lower aggregate beta, where alpha (stock picking) will drive returns rather than broad index appreciation.

Patterson's Strategy: Maintain a strategic overweight to U.S. equities and slightly overweight on a tactical 6–12 month horizon.
- Rationale: U.S. companies offer better liquidity and safety during downturns, and the home bias of American investors provides a buffer.
Oppenheimer's Strategy: Focus on regional and factor diversification rather than a blanket U.S. overweight.
- Rationale: With narrowing profit differentials and lower aggregate beta, investors should be agnostic to region and focus on high-quality companies globally (e.g., "granolas" in Europe).
Boivin's Strategy: Maintain a cautious stance on the broad equity market index but identify opportunities within specific themes.
- Short-term government debt/cash: Retains appeal due to persistent high rates and a lack of macro tailwinds for equities.
- Thematic investing: Focus on AI and the future of finance within the U.S. universe.
- Private credit: Views as a structural growth area that may cushion cyclical pressures better than public credit.