U.S. stocks are no longer "leading the way"! Morgan Stanley warns: three driving factors are weakening

According to the Zhitong Finance APP, JPMorgan recently released a research report stating that the trend of the U.S. stock market outperforming other global markets for a long time may be reversing. JPMorgan pointed out that over the past 15 years since 2010, the U.S. stock market has shown significant excess returns compared to other global markets. However, since the beginning of this year, the "glory" of the past years has not been replicated, and the performance of the U.S. stock market has significantly lagged behind other major markets. The question is whether the underperformance of the U.S. stock market this year is the beginning of a long-term trend reversal?

JPMorgan believes that three positive driving factors for the U.S. stock market may be changing:

1. Over 40% of the excess returns in the U.S. stock market come from the "Seven Giants," but in a world where artificial intelligence (AI) is gradually becoming mainstream, these tech giants may no longer be as unique. The risk is that the investment returns from the "Seven Giants" may be disappointing. There are also concerns about the high concentration in the U.S. stock market. Although retail investors have been buying on dips so far, this situation may change if the labor market weakens.

Moreover, if the bank's judgment about the U.S. economy entering a recession is supported by more evidence, will the "Seven Giants" still perform like a structurally growing industry? After all, U.S. tech companies are now so large that it is difficult for them to operate independently of the macroeconomic environment; they largely depend on consumers and the advertising market, both of which are ultimately cyclical. The bank downgraded its view on growth stocks last summer and believes that the "Seven Giants," tech stocks, and growth stocks are unlikely to lead the market this year.

1. The U.S. dollar has been strong for the past 15 years, but it may no longer be regarded as a safe-haven asset, especially in the context of narrowing real interest rate differentials and questions about the credibility of the Federal Reserve. If the dollar weakens, international markets typically perform better, and vice versa.

2. In recent years, U.S. economic activity has generally outpaced other countries, but this lead may be diminishing due to its high fiscal deficit, while fiscal stimulus from Europe and China may be stronger.

On the other hand, Europe has previously faced three major headwinds: 1) Weak growth in its largest export market, China; 2) Germany's "debt brake" policy limiting effective fiscal support; 3) The Russia-Ukraine war disrupting energy security. However, these three adverse factors may now be undergoing positive changes:

1. China may introduce stronger fiscal stimulus measures in the future, and the real estate market is also expected to stabilize.

2. Despite initial implementation challenges and lower multiplier effects, Germany's stimulus measures may be transformative, amounting to 20% of GDP.

3. If a ceasefire agreement is reached in the Russia-Ukraine war, Europe may "unexpectedly" benefit from a decline in Brent crude oil prices, and natural gas prices may also fall accordingly Looking back at the period when the U.S. stock market began to lead—15 years ago—the price-to-earnings ratio (P/E) of the U.S. was basically on par with other global markets, while now it is about 43% higher. The weight of the U.S. in the global stock market has also increased from below 50% in 2010 to over 70% today. In summary, Morgan Stanley believes that the current risk-return profile of international markets may have a positive asymmetry: that is, during periods of market de-risking, performance will not decline excessively, while during times of improving market sentiment, it may perform outstandingly