Feds Interest rate cuts, Trump’s pro-crypto stance, US equities, and AI stocks surge leading up to US market dominance
The US stock market has experienced several critical challenges to its global supremacy over the years. In the late 1980s, the US stock market’s global dominance was nearly overtaken by Japan in terms of market size, with both countries exhibiting similar valuations. However, Japan’s economic bubble burst in the early 1990s. This led to a prolonged bear market that significantly reduced Japan’s market share compared to US stocks.
From March 2000 to October 2002, the NASDAQ lost 78% and the S&P 500 fell 49% from their respective peaks due to the bursting of the dot-com bubble. This bubble saw a substantial decline in tech stocks. This momentarily affected US stock market dominance but was followed by a recovery in subsequent years that didn’t last long.
The 2007-2008 global financial crisis furthered the erosion of market confidence. This crisis led to significant losses in US equities and raised questions about their stability compared to emerging markets. The DJIA and S&P 500 lost about 54% and 57%, respectively. However, post-crisis recovery strategies helped restore US dominance.
The above-mentioned turning points underscore that the US stock market has repeatedly proved resilient and capable of recapturing the driver’s seat. However, changing geo-economic conditions and market volatility still pose concerns about whether this momentum will continue.
Let’s explore the current state of US stocks, whether the US stock market will continue its dominance, and the factors affecting it in detail.
Major Indices and Current US Stock Market Performace
The US stock market, led by the S&P 500, has performed pretty well in 2024, but questions remain regarding sustainability in the global context. The S&P 500 jumped 24%, beating European, Asian, and emerging-market benchmarks. A valuation premium relative to a global MSCI index hit a 20-year high, trading at 22 times expected future earnings. Despite these figures, argumentation is becoming more robust on whether US equities are still dominant globally or if the balance of power shifts.
The Tech Surge and AI Hype
AI stocks have been the primary pusher of the S&P 500 rally in recent days, with the sector leading.
Companies such as Nvidia that have benefited from the AI-driven demand have taken the lead. This enthusiasm, coupled with strong corporate earnings, has widened the valuation gap between US stocks and international peers. For instance, at a time when S&P 500 earnings are up 9.9% in 2024 and with a projection of 14.2% in 2025, Europe’s Stoxx 600 is expected to log an earnings growth of merely 1.8 percent this year.
Additionally, the dominance of tech giants like Apple, Microsoft, Amazon, Alphabet, etc. has bolstered US stock markets. The five companies together have a valuation of more than US$14 trillion, which surpasses the entire STOXX 600, valued at US$11 trillion.
Economic Fundamentals and Policy Impact
The International Monetary Fund predicts the US economy will grow at 2.8% by the end of 2024, which is faster than that of the Eurozone, which was expected to expand by only 0.8%.
The recent interest rate cuts by the Federal Reserve and President-elect Donald Trump’s pro-growth crypto policy agenda have further cemented investor confidence in US markets. Trump’s agenda on tax cuts, deregulation, and tariffs may boost US equities further and sustain the upward momentum of US stocks until 2025. However, risks include an increase in trade tensions and ballooning federal deficits.
Emerging Markets and the Future of US Stock Market Leadership
Emerging markets have increasingly challenged the dominance of the US stock market, especially in recent years. Countries like China and India are now major players, significantly contributing to global equity indices as their economies grow rapidly.
Currently, US equities remain strong, supported by resilient tech stocks and economic stability. However, the rise of emerging markets highlights a gradual shift in global influence, signaling potential changes in the traditional hierarchy of stock market leadership shortly.
A Surge in Investor Confidence
There are strong signs of investors’ preference for US equities. After the November election, US equity funds received more than US$80 billion. European and emerging-market funds experienced outflows during the same time, according to a Deutsche Bank report. This trend shows growing optimism about prospects in the US market, with strategists from Morgan Stanley and UBS Global Wealth Management recommending an overweight position in US stocks for 2025.
Valuation Concerns and Global Implications
Despite its dominance, the valuation of the US market has caused unease. The S&P 500 trades at a 60% premium to international equities, making it the priciest market in the world. This disparity can encourage investors to look at opportunities in undervalued international stocks, especially as geopolitical uncertainties and trade risks dissipate.
JPMorgan strategists have pointed out that convergence may be possible if the gap in valuation in the US stocks becomes unsustainable. However, they emphasize that clarity on trade policies and geopolitical developments will be crucial before a shift toward global markets occurs.
Is it a Good Time to Invest in US Stocks?
For shareholders who are concerned about their portfolios, the attraction of US stocks is strong due to the significant earnings growth and lax economic policy. The ongoing strength in tech behemoths, along with the resiliency of consumer spending, underscores the market’s longer-term potential for gain.
Shareholders must carefully review valuation levels, however, as some sectors may be trading at historically high multiples. Geopolitical risks, such as trade tensions and global conflicts, can also introduce volatility, and hence diversification is the need of the hour. Shareholders should be well-informed and have a balanced approach to capitalize on opportunities while managing potential risks effectively.
Conclusion
US equities will continue to dominate the global scene in the coming years as corporate earnings remain strong, thereby propelling US stock market dominance further. Analysts see the S&P 500 reaching 6,600 in 2025 with the support of AI breakthroughs, tax cuts, and deregulation. A full-scale trade war could be looming on the horizon, however, and its effects on the global market would be devastating.
For now, the US is still the leading player in global stock markets. The valuation gap, trade policy uncertainties, and changes in geopolitics might test its dominance in the next few years.
