U.S. Equity Leadership: 3 Key Trends To Watch

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by: FTSE Russell

By Alec Young, managing director, global markets research

The yawning gap between US and international equity performance that has been building since 2011 persists unabated. Through mid-September, the Russell 1000 Index has generated a year-to-date total return of 9.6% compared to a 4.4% decline for the FTSE All-World ex US Index and a 10.1% decline for the FTSE Emerging Index (in USD).

In analyzing US equity leadership over non-US stocks, FTSE Russell Global Markets Research believes three trends bear close watching. These include US yield curve flattening, consensus forecasts for a lower 2019 Russell 1000 Index earnings growth closer to that of the FTSE World ex US Index, and lastly, a widening sentiment gap as investors increasingly sour on non-US stocks.

Slowing economic growth?

Strong August US ISM Manufacturing and Non-Manufacturing Index readings indicate US economic momentum persists. However, this optimism is at odds with the messaging from the bond market. As the chart below shows, the ISM Manufacturing Index roughly tracks the US yield curve with a 12-month lag. The flattening yield curve suggests August's robust readings may be its peak for this cycle. Manufacturers surveyed also noted growing constraints from supply-chain disruptions, tariffs and tight labor resources.

This chart contains forward-looking representations based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Please see the end for important legal disclosures.

A narrowing US earnings growth advantage

On the heels of several years of superior US corporate profit growth, consensus earnings growth forecasts point to a narrowing US fundamental advantage next year. Based on consensus forecasts, earnings growth for the Russell 1000 Index (9.0%) is still expected to outpace the 8.3% growth projected for the rest of the world (represented by the FTSE World ex US Index), but is significantly lower than the 20.1% forecast for 2018 (see chart below).

This chart contains forward-looking representations based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Please see the end for important legal disclosures.

Widening sentiment gap as investors sour on non-US stocks

Not surprisingly, 2018's notable US equity leadership over non-US stocks has led investors to strongly favor the US while simultaneously shunning international shares. Our FTSE Russell Composite Sentiment Indicator incorporates an average of four technical indicators designed to measure the breadth of the market and signal a potentially overbought or oversold reading. A sentiment score of 5 signals an extremely overbought condition, while 1 signals extremely oversold.

The chart below shows the increasing divergence between US and international equity sentiment as the FTSE Russell Composite Sentiment Indicator score of the Russell 1000 and FTSE World ex US have increasingly parted ways. The current spread between the two sentiment indicators is the widest in more than five years.

Please see the end for important legal disclosures.

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