The S&P 500 Index set a new all-time record high during intraday trading on Monday, and is trading at rich valuation premiums versus many overseas markets, making cautious investors consider reducing their U.S. equity exposures. Goldman Sachs, however, advises investors to go "overweight" U.S. stocks, per a report in Bloomberg. Their reasoning is that, as the global economy slows down, growth in the U.S. remains considerably stronger than in most other regions.

"The main returns in our view still come from having an overweight to U.S. equities,” Silvia Ardagna, a managing director in the investment strategy group for Goldman Sachs Private Wealth Management, which has $500 billion in assets under management (AUM), told Bloomberg. “The U.S. has the prominence over others,” she added.

Significance For Investors

“The de-escalation of trade tensions between the U.S. and China has triggered the question whether investors have been too negative and there could be some positive surprises,” observed Ardagna, formerly an associate professor of economics at Harvard University and later the senior European economist at Bank of America Merrill Lynch before joining Goldman. “If we get better economic data and there’s a stabilization in the manufacturing and the services sector remains robust, this rally can clearly extend,” she elaborated.

Key Takeaways

  • Goldman Sachs advises investors to be "overweight" in U.S. stocks.
  • They see the U.S. leading most of the world in economic growth.
  • U.S. stocks have outperformed most overseas markets in 2019.
  • The valuations of U.S. stocks are higher than most other markets.

Benjamin Lau, chief investment officer (CIO) of Apriem Advisors, also is bullish on U.S. stocks, for the same reason. “The economic growth justifies being more optimistic on stocks than bonds at this point,” he told The Wall Street Journal. In recent months, he has been buying health care, semiconductor, and industrial stocks that are inexpensively valued.

All 11 S&P 500 sectors have risen in 2019, with the full S&P 500 Index up by 23% for the year-to-date through Monday's close, on course for its best calendar year since 2013. The MSCI US index also has risen by 23% YTD, handily beating Europe (+16%), China (+12%), and emerging markets (+10%), per the Journal. Similarly, the MSCI All-Country World Index ex USA Index is up by only 14%.

The KBW Nasdaq Bank Index of 24 lenders is another strong performer, up 26% YTD. By contrast, the iShares MSCI Europe Financials ETF (EUFN) is lagging, with a 15% YTD gain, per “Consumer confidence continues to be strong,” remarked Terrance Dolan, CFO of U.S. Bancorp, during his company’s earnings call in October.

Many European banks are cutting costs to stay competitive with U.S.-based rivals, the Journal notes. Indeed, while big U.S. banks have been increasing their footprint in Europe, leading European banks have been retreating from the U.S. market, per earlier reports.

A concern for value-focused investors is that U.S. stocks are relatively expensive, compared to overseas equities. As of Oct. 31, the S&P 500 had a trailing P/E ratio of 19.9, versus 17.1 for Japan, 16.6 for Europe, and 12.8 for Korea, per data from FactSet Research Systems reported by the Journal. The bullish response is that higher growth in the U.S. justifies a valuation premium for U.S. stocks.

Looking Ahead

“The uncertainty is super high, and in many cases the uncertainty is driven by something you can’t analyze,” Jim Besaw, chief investment officer (CIO) at investment management and wealth advisory firm GenTrust, told the Journal. His firm recommends allocations mostly in line with the MSCI All Country World Index, while favoring emerging markets and Japan.

“If you’re a long-term investor, then that valuation trade is meaningful,” said Nela Richardson, an investment strategist at Edward Jones, per the Journal. His firm also is overweight international stocks versus large cap U.S. equities. “If you look historically, that international-U.S. equity leadership has rotated,” he added.