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Is US outperformance at a turning point?
- US equity outperformance is projected to persist over a five-to-ten year horizon, driven by a regime shift favoring organically growing companies and a technology sector expected to deliver a productivity lift comparable to the personal computer era, though this outlook is considered more uncertain than in the past.
- A substantial productivity increase from AI and technology is anticipated to take approximately a decade to disseminate broadly across the economy, with the US benefiting more than other nations due to a critical mass of cash-rich tech firms, a tech-savvy labor force, and government support contrasting with China's increasing skepticism.
- Valuation risks remain a primary constraint, as the current run of US outperformance is expected to end if assets become over-owned and high-valued, potentially triggering capital rotation toward China and BRICS nations following their own cycles of rising valuations.
- Material structural headwinds include binding demographic shifts with an unprecedented retirement wave, a geopolitical "rewiring," and a transition to a low-carbon economy, which together may result in lower trend growth, a resetting of interest rates, and a potential rise in labor income share that pressures corporate profits.
- The equity market is forecast to enter a phase of lower aggregate beta with wider trading ranges, where profit growth differentials across major regions will narrow, requiring investors to be agnostic to region and factor while focusing on high-quality companies regardless of location.
- Investment positioning expectations include a preference for US equities over the long term and a six-to-12 month outperformance during downturns due to home bias and liquidity flows, alongside an expected underweight in broad equities and a medium-term increase in the importance of private credit to cushion initial market pressures.
- Financial market conditions are expected to feature moderately falling interest rates over the next few years that will not reach post-financial crisis lows, reducing the revaluation driver for long-duration equities while maintaining the persistent appeal of short-term government debt and cash.