Past Fed easing cycles have often led to stronger U.S. equity returns, according to an analyst.
It’s Jobs Friday, and with inflation seemingly under control, the nonfarm payrolls report is reclaiming its status as a key economic indicator, bringing back some normalcy for traders. However, the U.S. stock market has recently faced an unusual period of underperformance compared to previous years.
Hubert de Barochez, senior markets economist at Capital Economics, points out that since mid-June, the MSCI USA index has gained less than 5%, about half the return of global markets excluding the U.S. De Barochez, a French native working in London, identifies four main reasons for this underperformance.
First, technology stocks, which make up a large portion of the U.S. market, have lagged behind. “While there’s been a slight recovery, U.S. tech stocks have dropped more sharply than global counterparts. Additionally, the communication services sector in the U.S. has declined while rising elsewhere,” he explains. Concerns over an economic slowdown have raised doubts about the sustainability of earnings growth in big tech, which had been “priced for perfection” until recently.
Second, the U.S. market has less exposure to financial stocks, which have rallied due to a steepening yield curve that boosts bank interest margins. Financials account for just 13% of the U.S. index but 22% of the global ex-U.S. index.
Third, the depreciation of the U.S. dollar has played a role. The DXY index has fallen over 3% since mid-June, boosting returns from non-U.S. equities in dollar terms. For instance, Japanese stocks have outperformed U.S. equities, with the yen’s nearly 8% jump converting a small decline in Japan’s MSCI index into a significant gain in dollar terms.
Lastly, Chinese stocks have surged, with the MSCI China index up nearly 30% in dollar terms since mid-June, as Beijing’s large stimulus measures took effect.
Looking ahead, Capital Economics expects many of these factors to continue influencing Wall Street’s performance. However, de Barochez believes the U.S. market will regain its lead, consistent with historical patterns seen during past Fed easing cycles, where U.S. equities typically outperformed.
Moreover, he anticipates growing investor excitement around AI will drive another market boom. While AI-driven profits have already bolstered tech stocks, de Barochez argues that if AI is recognized as a “general purpose technology” like the steam engine or the internet, expectations could rise even further, fueling a potential stock market bubble. However, he warns that a bursting of the AI bubble, possibly in 2026, could severely impact U.S. equities.
