What’s Been Driving U.S. Equity Outperformance?

By Philip Lawlor, head of Global Investment Research

Despite falling more steeply in the March downdraft, US equities have handily outperformed international stocks this year. Indeed, the US has gained much of its edge since June, when the rally elsewhere began losing steam.

As the chart below shows, since the beginning of 2019, the Russell 1000 has amassed a nearly threefold lead over the FTSE All-World ex US. That includes the US large-cap index’s nearly 55% surge since the depths of the pandemics in late March, more than two-thirds higher than the 33% gain for the rest of the world.

Russell 1000 vs FTSE All-World ex US Indexes (local currency, TR, rebased)

Source: FTSE Russell. Data as of September 30, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

The difference in fortunes has two explanations: First, the US equity market is much more heavily weighted to the big technology companies dominating the digital economy, which have emerged as major beneficiaries of the severe lockdown orders that have kept millions of people stuck at indoors. These tech behemoths have been dominant drivers of outperformance, as shown in the top-10 sector-weighted contributions to Q3 returns for the FTSE USA and its international counterpart below.

Sector-weighted performance contributions

Source: FTSE Russell. Data as of September 30, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

Second, the US market has also benefited from having a much more concentrated stock-level performance effect. Sector-weighted contributions to total returns from the 15 largest stocks in the Russell 1000 have significantly outstripped those of its peers in Europe, Asia-Pacific and Japan, and were negative in the UK so far this year.

Stock-weighted contributions of 15 largest stocks to year-to-date market returns (%)

Source: FTSE Russell. Data as of September 30, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

© 2020 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided “as is” without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.

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Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.

This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.

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Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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