The dominance of U.S. stocks in the global market has reached unprecedented levels. Despite this, there is speculation on whether buying more international stocks would be a wise move.

In a recent note to clients, Manish Kabra, SocGen's head of U.S. equity strategy, highlights several key reasons that support his view on the matter:

Reasons for Continued Divergence

  1. S&P 500 Profit Cycle Outperforms Global Cycle
    The profit cycle of the S&P 500 is currently outperforming the global cycle.

  2. Positive EPS Surprises Expected for the Cash-Rich S&P 500
    SG Global Cycle indicator indicates that there will be more positive earnings per share (EPS) surprises in store for the cash-rich S&P 500.

  3. Contrast Between Nasdaq-100 and Sluggish US Small-caps
    The profit cycle of the Nasdaq-100, a tech-heavy index representing half of the S&P 500, is currently at all-time highs. In contrast, the US Small-caps (Russell-2000) are experiencing sluggish performance.

  4. Market Breadth Should Not Be Overlooked
    It is essential not to be swayed by the weak breadth of the market, where both the S&P 500 equal weighted and US small-caps (Russell-2000) have seen declines this year.

  5. Small-cap Participation Needed for Improved Equities Breadth
    The breadth of equities will only improve with small-cap participation. However, this requires a significant drop in Fed rates (100 basis points). For those interested in small-caps, it is advisable to consider our quant teams' small-cap ex-junk options.

  6. U.S. Bonds Are Not Restricting S&P 500 Performance
    Although we are underweight on bonds, U.S. bonds should not hinder the performance of the S&P 500. In fact, there is value in US 10-year bonds with yields above 5%.

  7. Extremes Become More Extreme with Prolonged Higher Rates
    The notion of "higher for longer" implies that extremes, such as the dominance of U.S. stocks, will continue to become more extreme.

Performance of the Magnificent Seven

The rally in the S&P 500 index throughout 2023 has been characterized by the outstanding performance of the Magnificent Seven. This group consists of mega-cap technology stocks that have been responsible for driving almost all of the S&P 500's year-to-date gain. Additionally, they have played a significant role in the overall increase of the Nasdaq-100 index.

Despite the ongoing dominance of U.S. stocks, it remains a topic of debate whether investors should consider expanding their investment into international stocks.

Tech Stocks Push U.S. Equity Market to New Highs

The staggering surge of tech stocks in the U.S. market has resulted in an unprecedented ratio between the Nasdaq 100 NDX and small-cap stocks. With the Federal Reserve's commitment to maintaining elevated interest rates well into the coming year, these "extremes" are poised to reach even greater heights.

According to recent data from FactSet, U.S. stock-market breadth has rebounded since early November, exemplified by the Russell 2000's impressive 8% growth since November 1st.

Despite this recovery, tech stocks have continued their upward trajectory. With more stocks participating in the rally without a significant rotation away from big tech, the United States is anticipated to strengthen its position in the global equity market.

The outlook for U.S. corporate earnings remains highly favorable, further diminishing the likelihood of a shift away from U.S. market leadership. FactSet data reveals that since the start of 2023, the S&P 500 has surged over 17%, surpassing the 12.3% gain of the MSCI AC World index UK:XMAW.

However, opinions on Wall Street are divided. While some, such as Michael Hartnett from Bank of America Corp., urge investors to explore international opportunities rather than pouring more funds into Big Tech, others like Richard Bernstein, Chief Investment Officer of Richard Bernstein Advisors, see a rare chance for investors to uncover undervalued assets abroad.

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