August 27, 2025

QuickTakes

Update: Stay Home Versus Go Global

Nvidia reported better-than-expected earnings and revenue after the stock market closed today. Revenue growth has now exceeded 50% for nine straight quarters. Nvidia is one of several mega-cap technology stocks that have fueled the bull market in the US, causing it to outperform overseas stock markets. The outperformance was briefly interrupted earlier this year, but the US market seems to be back on its winning track.

We continue to recommend a Stay Home investment strategy rather than a Go Global one. We've been doing so since 2010, and it has worked out very well. The US now accounts for a whopping 72.0% of the market capitalization of the All Country World MSCI stock price index (chart). That's up from 50.0% in 2010. So, perversely, it is becoming easier to overweight the rest of the world, as it accounts for a relatively small 28.0% share of the world's market capitalization. We don't deny that foreign stocks are cheaper and that there are opportunities to diversify globally.

In addition to tracking the market-cap shares on a global basis, we also monitor the ratio of the US MSCI stock price index to the All Country World ex-US MSCI stock price index in local currency and in US dollars (chart). These two ratios tell the same story. The ratios did fall earlier this year, particularly in dollar terms. However, they seem to be back on their long-term uptrends.

We've often observed that the outperformance of the US in the global stock market derby is fundamentally based on the outperformance of the US MSCI forward earnings compared to the forward earnings of the rest of the world (chart).

The weaker dollar exacerbated the underperformance of the US earlier this year in dollar terms (chart). We've noted that the DXY dollar index exaggerated the weakness of the dollar this year because it is a fixed-weight index that assigns the euro a 57.6% weight. Also in the DXY are the yen (13.6%), the pound (11.9%), the loonie (9.1%), the krona (4.2%), and the Swiss franc (3.6%). The MSCI currency ratio hasn't been as weak.

On a ytd basis, the dollar has been weak against the euro and the Mexican peso but strong relative to most other major currencies (chart).

The major attraction of foreign stocks is that they are cheaper than American ones (chart). The forward P/E of the S&P 500 is 22.8, while the All Country World forward P/E is 14.7. These valuation multiples have been increasingly diverging since 2012. The US has been winning the global doubleheader, as both its forward earnings and forward P/E have outperformed those of the rest of the world.

The rest of the world outperformed the US earlier this year, as evidenced by the ytd gains of several countries, including Spain, South Korea, South Africa, China, and Germany. But the US may be catching up again owing to better-than-expected earnings.

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