What causes one country’s stock market to outperform others? Over longer periods (more than five years), higher relative earnings growth is the primary driver. Earnings are influenced by two main factors: revenue growth and profit margins. Countries with higher GDP growth, or those fostering a culture that creates entrepreneurial or innovative companies capable of generating demand where it didn’t exist before (think Apple), tend to outperform. The second factor is profit margins. If three country indexes experience identical revenue growth, but one country's margins are expanding due to more efficient use of capital or labor, that country will see faster earnings growth over time.
With that in mind, let’s examine the relative performance of developed countries over the past 30 years. The chart below shows the performance of the U.S. compared to Canada, Europe, and Japan since 1991 in local currency. We’ve purposely removed the influence of the U.S. dollar to avoid distorting the relative return picture. While the dollar impacts U.S. investors' overseas returns, it can obscure the comparison of stock market performance. Since 2010, the U.S. has vastly outperformed its developed-market peers.
Certainly, revenues and growth tell part of the story. Since the Great Financial Crisis, North America—and the U.S. in particular—has enjoyed stronger nominal growth compared to Europe and Japan.
In addition to higher revenue growth and a robust culture of innovation and entrepreneurship, another key factor that has boosted U.S. performance is greater relative efficiency. The chart below shows productivity data for the U.S., Canada, Europe, and Japan. Since 1991, the U.S. economy has become 30–40% more productive than its developed-market peers. Small differences in productivity can add up significantly over time
Another measure of efficiency is competitiveness, as reflected in unit labor costs relative to output, shown below. Although the divergence in labor costs hasn’t been as pronounced as in productivity, it’s clear that since 2010, U.S. unit labor cost competitiveness has improved, while other developed economies have remained flat or declined.
In summary, the U.S. stock market has outperformed its developed-market peers for several reasons. The U.S. hosts the world’s largest capital markets and has a culture of entrepreneurship that has transformed our daily lives. These factors are harder to quantify but have contributed to stronger earnings growth. While faster relative growth has played an important role in earnings growth, the most identifiable metric has been the U.S.’s relative increase in efficiency. U.S. productivity and competitiveness have outpaced other developed markets considerably over the last 15 years or more. It’s uncertain whether this trend will continue, but since productivity and economic efficiency are partly driven by technological development, there’s potential for it to persist. The much-anticipated AI-driven productivity boom may or may not materialize, but for now, its epicenter remains firmly in the U.S.
Data Source: Bloomberg
Make the most of these insights using Modelist. We create customized investment models for the fiduciary financial advisor. Get in touch with us at hello@modelist.me for a personal consultation.
Modelist Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.