Since January, market developments have once again reflected a very strong outperformance of the United States compared to the rest of the world. And the gap has widened further in recent weeks.
In this second part of the year, the American market is successively breaking its own records, clearly surpassing the previous high points reached in May, when Europe and the world index, excluding the United States, failed to do so. . The resulting performance gap is around 10% to the advantage of the American market since mid-May.
This stock market development is all the more impressive given that since mid-June we have been witnessing downward revisions to the profits of S&P 500 companies expected for the third quarter. In addition, it is part of a movement of rising rates with an increase of 60 basis points (bps) in US 10-year bonds compared to their low in mid-September.1. These very good performances and the resulting gap with the rest of the world can be explained in particular by strong divergences on the macroeconomic level.
Since the Fed’s 50 bps rate cut on September 18, American economic data has shown a certain strength, whether through job creation, the rate of inflation and, more recently, retail sales. Added to these data are the political situation and the rise of Donald Trump in the polls as the American presidential election approaches. This factor can notably explain the tensions on 10-year interest rates, but also their weak short-term impact on stocks, linked to the hope of a reduction in the corporate tax rate promised by the Republican candidate.
In Europe, macroeconomic data shows continued stagnation. The three major countries – Germany, France and Italy – remain penalized by a struggling industrial sector. Furthermore, despite a significant amount of savings accumulated by households, consumption remains at half mast, undoubtedly due to fear of a deterioration in the job market, but above all, due to the measures taken by the authorities budgetary measures to converge towards their deficit commitments to the European community. During this period, only Spain and Portugal showed a certain dynamism.
At the same time, on both sides of the Atlantic, corporate profits increased significantly, by more than 40% compared to the end of 2019.1driven by the capacity of the latter to reflect in prices, the increase in the costs of raw materials, then wages. On the other hand, it seems that over the recent period, the disinflation observed in a context marked by a certain resilience of wages tends to hinder their ability to generate growth in results and maintain their margins.
Based on US market valuations currently standing at 22x expected 2025 earnings – up 15% – investors appear extremely optimistic1. The same observation can be made regarding hopes for a rapid return of American rates to neutrality, of around 3%.2. Even more so if activity continues to hold up in a context of tense salary negotiations and on the eve of a major election. To justify these valuations on American stocks, artificial intelligence would have to be able to quickly generate significant productivity gains.
In Europe, the consequences of necessary budgetary consolidation concomitant with investment needs in climate transition and defense on growth remain to be measured, at a time when the United States could erect new customs barriers. Likewise, we can wonder whether better management of public finances would be likely to generate a “Ricardian effect”, namely, a deflation of savings accumulated during the “Covid period” making it possible to encourage a return to more consumption. in line with its historical levels.
1Source: Bloomberg, 25/10/2024.
2Source: consensus, 25/10/2024.
