On March 11, 2020, the World Health Organization officially designated Covid-19 as a global pandemic. Over the past four years, we’ve encountered a pandemic leading to the global economic shutdown, conflicts, an unprecedented rise in inflation, historic interest rate hikes, and discussions surrounding a technological transformation and a stock market bubble.
Why the US continued to outperform other markets
A striking aspect of the last four years is the consistent outperformance of the United States equity market compared to others, a trend that dates back to 2009. There was a period when it appeared China might emerge from the pandemic in a stronger position than Western countries, a sentiment mirrored in market valuations. However, the outcome was quite the opposite, and today the MSCI China Index remains 30% below its pre-Covid levels.
There are multiple factors contributing to this. The strength of the US dollar throughout this period has dampened the returns of other markets. Additionally, the resilience of US economic growth has surpassed that of other developed economies. For example, during the energy crisis triggered by the Russian invasion of Ukraine, which affected Europe and other regions, the US, being a significant oil and gas producer, faced a relatively minor impact. Furthermore, when the Federal Reserve initiated rate hikes, the effects on households and businesses with fixed-rate debt were limited. In contrast, in many other countries where variable-rate debt is prevalent, borrowers were more severely affected.
The US government’s seemingly limitless readiness – and capacity – to borrow funds played a significant role. Following the Coronavirus Aid, Relief, and Economic Security Act, there was another round of stimulus in December 2020, followed by the $1.9 trillion American Rescue Plan in March 2021, and President Joe Biden’s signed (though misleadingly named) Inflation Reduction Act. This legislation, among other provisions, allocates substantial funding for the construction of microchip and battery manufacturing facilities. On the downside, this means that US government debt will continue to climb steadily in the coming years.
Furthermore, technology played a crucial role. The sudden and mandatory transition to remote work significantly benefited technology firms, albeit temporarily in some instances. Zoom, for example, experienced a sevenfold increase in its share price in 2020, though it is currently trading close to pre-Covid levels. Presently, the focus has shifted away from video conferencing, online retail, or streaming services. Instead, the spotlight is on generative artificial intelligence (AI).
Nvidia, a supplier of advanced microchips utilized for powering AI models, emerged unexpectedly to become the world’s third most valuable company, joining tech giants such as Microsoft, Amazon, Apple, and Alphabet (Google’s parent company). All of these companies are based in the United States.
These companies originated as concepts conceived by founders, often students at prestigious American universities. Transforming these concepts into viable businesses demands an entrepreneurial and risk-tolerant culture, along with access to funding. The United States possesses an unparalleled financial infrastructure, including venture capital firms specializing in investing across all stages of growth for these startups. Additionally, US markets are progressively drawing international technology firms for their initial public offerings. By doing so, these firms gain access to a broader investor pool and achieve higher valuations, much to the dismay of policymakers in their home nations.
Under the leadership of these technology firms, earnings growth in the United States has outpaced that of other markets. However, investors have also been willing to pay a premium for this growth. US price-earnings (PE) ratios have surged more rapidly compared to other regions. In 2010, the S&P 500 traded at a similar forward PE ratio as non-US equities. Today, it commands a significantly higher valuation.