Another reason U.S. outperformance might continue: The most profitable companies on the planet dominate our stock market. The “magnificent seven” corporations (Apple, Nvidia, Microsoft, Amazon, Alphabet, Meta and Tesla) now make up 33% of the entire S&P 500 by market capitalization (up from 28% a year ago). Through the past decade, the free cash flow of these companies has typically exceeded 20% of sales, which is twice the average cash flow of other S&P 500 companies (around 10%).
In the past two years, these seven stocks have been the rocket fuel propelling portfolios to new heights. Even if we remove Nvidia’s 700% return in the past two years, the other six stocks have averaged a gain of 160% in the same period. Exceptional.
Growth and cash flow are not the only areas to consider when investing, of course. Valuation matters, and international equities are certainly less expensive. The MSCI EAFE index has a forward price-to-earnings (P/E) ratio around 14. The MSCI Emerging Markets index has a forward P/E around 12. Those are both far cheaper than the S&P 500, which has a forward P/E above 22.
It’s possible the environment abroad will become more favorable for non-U.S. stocks. Chinese equities bounced last week following news the Chinese government will embrace a “more proactive” and “moderately loose” monetary policy in 2025, signaling coming rate cuts and other potential stimulus measures.
Stimulus would help, but the truth is such changes will also benefit U.S. corporations that already generate billions in revenue overseas. And let’s not forget that with China there remains legitimate concern for another Trump trade war.
The odds-on bet is that the relative outperformance of American stocks will continue. Having conviction in this outlook might not require any major portfolio repositioning, but it should at least provide some perspective in understanding how fortunate we are to live in and invest in the best economy on earth.
