How Long Can the US Market Outperform the World?

Whether you measure by region, majority country, size or style, the US market has been outperforming the world in recent years.

Matthew Bartolini studies the causes for this outperformance and considers why this momentum may slow.

With just a few weeks left in 2024, the S&P 500 Index is poised to outperform non-US markets for another year. If that happens, it would be the eighth year of the past 10 that the US beat the rest of the world.¹

But calendar-based returns tell only part of the story. US outperformance extends to multiple measures from size and style to sector and country-bias, underscoring why geographically diversified portfolios have underperformed home-biased US-concentrated portfolios.

Let’s explore the reasons for US dominance and what, if anything, could stop the recent US reign that has been so detrimental to diversified investors.

US Has Dominated the Rest of the World Over the Past Decade

Many point to Big Tech as driving US dominance. Sure, Tech is helping power today’s US returns, but outperformance extends beyond sector effects.

On rolling 10-year returns, the US has outperformed the rest of the world for a record 134 consecutive periods (Figure 1). In fact, every rolling 10-year period from 2013 onward has favored US equity markets. Controlling for currency translation, the US has beaten a hedged version of the rest of the world for 180 consecutive rolling 10-year periods.²

Controlling for currency effects is just one way to show the significance of US dominance. Illustrating the robustness of the outperformance, the US has come out on top consistently when measured by:

The last screen is to examine by sectors. There are two ways to control for sector effect. One is to compare equal weighted sector exposures of both US and non-US. The more robust option is to have a sector versus sector horserace.

And there, since 2010, the US sector has beaten its non-US counterpart in an overwhelming majority of the rolling 10-year windows analyzed (Figure 3). In fact, seven sectors have a greater than 70% hit rate — led by Tech and Energy with 100% hit rates.

Earnings, Productivity, Margins, and Global Expansion Drive US Dominance

The dominance of US returns has coincided with these fundamental trends:

1. Accelerating earnings per share in the US: With earnings per share increasing faster in US markets than in non-US markets around 2013,⁹ greater earnings power than other regions encouraged capital to flow to the US.
2. Improving US margins: Reflecting the increased profitability in the US, profit margins have been exceeding non-US market margins by an average of 2.5 percentage points since 2010 compared to an average 1.2 percentage excess margin between 2000 and 2010.¹⁰
3. Cleaner balance sheets: Balance sheet strength also became a fundamental advantage for US firms. Based on Net debt-to-EBITDA, US firms de-levered at a faster rate and had cleaner balance sheets without potentially unstable debt loads.¹¹ Higher quality balance sheets combined with more productive growth helped support returns and investment.
4. Global expansion by US firms: Based on revenue generation, US firms, on average, generated around 30% of their profits from overseas prior to 2010. Since then, that average has been consistently around 40%.¹²
5. Increased productivity and efficiency: The margin improvement and ability to de-leverage was driven by greater operational productivity and efficiency. Evaluating the sales per employee (a measure of efficiency) for US firms relative to non-US shows just how much more productive US firms were at generating revenue per a unit of labor (Figure 4) and that was attractive to investment capital.

Taken together, greater earnings, increased productivity, improved margins, and broader distribution footprint have led to a persistently higher return on equity (ROE) in the US. And, at its core, ROE illustrates how efficiently a firm generates income and growth for its equity holders (Figure 5). The US’ consistently high ROE, which provides more shareholder value, explains its run of dominance.

But offering all the kudos to US firms becoming more efficient would be limiting. US companies have had plenty of support over the course of their winning run. Comparing the total debt as percent of GDP for both the US and Europe illustrates that corporate profits were boosted by rising relative fiscal spending.

While Europe practiced more austerity, the US added to its debt levels (Figure 6). This fiscal spending made its way into the US economy during a time of low rates, positive economic growth, and benign inflation in the US — amplifying the impact of these factors on corporate growth.

What Might End US Dominance?

Supported by persistent fundamental trends, the run of US dominance enters 2025 with significant momentum. Yet, these factors could slow or disrupt the dominance:

What Can Investors Do?

Can you predict the future? If so, follow your Back to the Future almanac predictions, Biff Tannen.

If not, remain balanced. Owning US exposures and non-US exposures keeps portfolios geographically diversified. Dominant runs end, or at least weaken, either through exhaustion (i.e., valuations) or a change in the environment (i.e., growth expectations/macro backdrop).

It’s been painful for the diversified investor to have missed out on concentrated US portfolios’ returns. Yet, no pain, no premium — and there has been a risk premium to owning a well-diversified portfolio over the long-run.¹⁴