US stocks no longer "dominate"! JP Morgan warns: three major driving factors are weakening.

JP Morgan recently released a research report stating that the trend of the US stock market outperforming other global stock markets for a long time may be reversing. JP Morgan points out that in the past 15 years since 2010, the US stock market has shown significantly superior returns compared to other global markets. However, since the beginning of this year, the past years of "brilliance" have not been replicated, and the performance of the US stock market has lagged significantly behind other major markets. The question is whether the lagging performance of the US stock market this year is the beginning of a long-term trend reversal. JP Morgan believes that three positive drivers of the US stock market may be changing: 1) Over 40% of the excess returns of the US stock market come from the "seven giants", but in a world where artificial intelligence (AI) is gradually becoming more widespread, these tech giants may no longer be as special. The risk is that the investment return of the "seven giants" may be disappointing. People are also concerned about the high concentration of the US stock market. Although retail investors have been buying on dips so far, this situation may change if the labor market weakens. In addition, if the bank's judgment on whether the US economy will fall into a recession is supported by more evidence, will the "seven giants" still perform like a structural growth sector? After all, US tech companies are now so large that they are difficult to separate from the macroeconomic environment, and they are largely dependent on consumers and the advertising market, both of which are ultimately cyclical. The bank downgraded its view on growth stocks last summer and believes that the "seven giants", tech stocks, and growth stocks are less likely to lead the market this year. 2) The US dollar has been consistently strong over the past 15 years, but it may no longer be seen as a safe haven asset, especially in a situation where real interest rate differentials are narrowing and the credibility of the Federal Reserve is being questioned. If the US dollar weakens, international markets typically perform better, and vice versa. 3) In recent years, overall economic activity in the US has generally been ahead of other countries, but this leading edge may be weakening due to its persistent budget deficit, while fiscal stimulus from Europe and China may be stronger. On the other hand, looking at the overall situation, Europe previously faced three major headwinds: 1) Weak growth in China, its largest export market; 2) Germany's "debt brake" policy limiting effective fiscal support; 3) The Russia-Ukraine war disrupting energy security. These three adverse factors may now also see positive changes: 1) China may introduce stronger fiscal stimulus measures in the future, and the real estate market may stabilize. 2) Despite initial implementation challenges and low multiplier effects, Germany's stimulus measures may have transformative significance, amounting to 20% of GDP. 3) If a ceasefire agreement is reached in the Russia-Ukraine conflict, Europe may "unexpectedly" benefit from a decrease in Brent crude oil prices, and natural gas prices may also decline accordingly. Looking back at the period when the US stock market began to outperform - 15 years ago - at that time, the US and global market price-to-earnings (P/E) ratios were roughly the same, but now they are about 43% higher. The weight of the US in the global stock market has also increased from less than 50% in 2010 to over 70% now. In summary, JP Morgan believes that the risk-return of the international market currently has positive asymmetric characteristics: that is, in a period of market de-risking, performance will not drop excessively, but it may stand out when market sentiment improves.