US stock reign may not last over other regions

NEW YORK — US stock prices are outpacing those in most other regions to start 2019, but the gap is narrow and some investors are eyeing potential catalysts to tip the scales to the rest of the world.

Investors say several factors could sway performance in favour of other developed or emerging markets, including slowing US profit growth, a weaker US dollar, improving economies in China and Europe and resolution of global trade tensions.

The 11 per cent gain this year for the S&P 500 is helping the US benchmark expand its global edge since the US equities bull run began a decade ago.

US stocks are near 70-year highs relative to other global developed markets, according to Bank of America Merrill Lynch.

“For the most part, it has been a pretty consistent trend that US outperforms non-US,” said Nathan Thooft, head of asset allocation for Manulife Asset Management in Boston.

“The reality is, though, it can’t go on forever.”

US corporate earnings are expected to climb 5.3 per cent this year after rising 24.4 per cent in 2018, according to global markets research at FTSE Russell.

European companies, excluding the UK, are expected to see profits rise 9.1 per cent this year, while profits for emerging market companies are projected to rise 13.9 per cent.

Moreover, the S&P 500 is trading at 16.4 times earnings estimates for the next 12 months, more expensive than the 13.4 times for Europe’s STOXX and 11.5 times for the MSCI emerging markets index, according to Refinitiv data. Moreover, the S&P 500’s valuation gap over those indexes is wider than it has been historically.

“People are willing to pay a very hefty premium for the US stock market,” said Lance Humphrey, a portfolio manager with USAA Asset Management. “It’s our view that the fundamentals in the US don’t necessarily justify the degree of that premium.”

That valuation difference has been one attraction in particular for emerging markets, which was the “most crowded trade” in a BAML fund manager survey last month.

The strength of the US dollar is another factor for emerging markets, many of which have debt denominated in the greenback.