In a revelation by a team of U.S. equity analysts at Goldman Sachs, the secret behind the U.S. stock market’s consistent outperformance against international counterparts has been unveiled.

The explanation is remarkably simple: U.S. corporate managers excel at optimizing returns from each dollar of equity investment. This performance metric, known as “return on equity” (ROE), is calculated by dividing a company’s net income by the value of shareholders’ equity.

Goldman’s chief U.S. equity strategist, David Kostin, along with his team, has published data demonstrating that U.S. companies consistently surpass their peers in Japan, Europe, and Asia in terms of ROE.

At the close of the first quarter, the trailing return on equity for S&P 500 index companies reached an impressive 20.4%, ranking it in the 97th percentile since 1975. However, the true significance lies in the change observed over the past decade. This is where the U.S. market shines brightest: the S&P 500 has boosted its ROE by a substantial 480 basis points during this period, compared to 370 basis points for European stocks in the Stoxx 600 and 310 basis points for Japanese stocks in the TOPIX index.

“The past decade has witnessed U.S. publicly-traded companies significantly enhancing shareholder returns, surpassing their European, Japanese, and Asian counterparts,” notes the Goldman Sachs team.

This remarkable expansion rate has enabled the S&P 500 to achieve annualized total returns of 7% since 2000, while Japan and Europe managed only 3% and 4%, respectively.

Despite Goldman’s anticipation of continued U.S. equity dominance over the long term, a surge in valuations during this year has introduced some complexities into the near-term outlook, according to the team.

As U.S. equity prices have swelled relative to projected earnings, portfolio managers have grappled with what Goldman terms “the triumph of hope over experience,” a concept reminiscent of the dotcom boom era.

The team highlights the significance of generative Artificial Intelligence (AI) and its potential disruptive impact, cautioning that while some firms may yield substantial AI profits, the returns on AI capital expenditure for many others remain unclear.

Goldman projects that due to the bulk contribution of AI-related stocks to this year’s multiple expansion, the S&P 500’s performance will deviate from its historical pattern and underperform in the next 12 months.

“While a high starting valuation is often seen as an obstacle to strong forward returns, our 12-month global equity forecasts suggest the U.S. will trail other regions. Yet, the persistent emphasis on boosting ROE implies that over time, U.S. stocks should outperform their global peers,” affirms the Goldman team.

As August begins, U.S. stocks are seeing a dip, with the S&P 500 down 0.2% at 4,579, while the Nasdaq Composite has dropped 0.5% to 14,269. In contrast, the Dow Jones Industrial Average is performing relatively well, having gained 72 points, or 0.2%, reaching 35,634 during the first half-hour of U.S. trading.

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