US stocks will continue to outperform international stocks over the next decade, DataTrek says

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  • Since 2005, US stocks have handily outperformed emerging market and developed international stocks, DataTrek said in a note on Thursday.
  • Expect the trend of US stocks outperforming international stocks to continue for the next decade, DataTrek co-founder Nicholas Colas noted.
  • Driving the next decade of returns will be the technology and communications sector, which make up 39% of the S&P 500, markedly higher than emerging market and developed international indexes.
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The trend of US stocks outperforming overseas stocks is set to continue until 2030, DataTrek co-founder Nicholas Colas said in a note on Thursday.

Investors holding out for mean reversion, expecting international stocks to outperform US stocks after years of underperformance, shouldn’t hold their breath.

Since 2005, the S&P 500 has handily outperformed overseas stocks, posting a return of 176%. Meanwhile, emerging market stocks posted returns of 96%, and developed international stocks returned just 21% over the same time period.

Colas looked underneath the hood of US, developed international, and emerging market stock indexes to better understand what has driven returns already and what is likely to drive them over the next decade.

With technology set to do much of the disruption in the coming decade, tech stocks likely have the “best chance of compounding at reasonable good returns for the next decade,” Colas said. 

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Technology and communication services stocks make up 39% of the S&P 500, 31% of the emerging markets index, and just 14% of the developed international index, according to DataTrek.

Meanwhile, a combination of regulatory scrutiny and likely low interest rates will lead financial stocks to face a steep climb in generating reasonable returns going forward, Colas observed.

The S&P 500 has a 10% allocation to financial stocks, while emerging markets and developed international indexes have a 17% and 15% allocation to financial stocks, respectively, according to DataTrek.

On top of that, the top five stocks in the S&P 500 index are highly profitable global technology leaders.

Based on the high allocation to technology stocks, the low allocation to financial stocks, and the composition of the top five holdings, the S&P 500 “has the best combination of attributes to outperform EAFE [developed international] and EM [emerging markets] over the next decade,” Colas said.

After the S&P 500, expect emerging markets to outperform developed international, Colas added.

While the ranking of sector allocations is not the traditional method of explaining the performance differences between US and international stocks, “we believe they are more grounded in the realities of how markets function than high-altitude assessments of geopolitics, global trade or long run valuations,” Colas concluded.

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