By Lewis Krauskopf

NEW YORK (Reuters) – U.S. stocks are extending their lead over their global counterparts and some investors say that dominance could increase if President-elect Donald Trump manages to implement his economic agenda without getting bogged down in a trade war. on a large scale or inflate the federal deficit.

The S&P 500 has gained more than 24% in 2024, putting it well ahead of benchmarks in Europe, Asia and emerging markets. At 22 times expected future earnings, its premium over an MSCI index of stocks from more than 40 other countries is at its highest level in more than two decades, according to LSEG Datastream.

Although U.S. stocks have outperformed their peers for more than a decade, the valuation gap has widened this year thanks to resilient economic growth and strong corporate profits – particularly in the technology sector, where Excitement over developments in artificial intelligence has boosted shares of companies such as chipmaker Nvidia.

Some market participants believe Trump’s agenda of tax cuts, deregulation and even tariffs may further fuel American exceptionalism, outweighing concerns about their potentially disruptive nature and inflationary potential.

“Given the pro-growth trends of this new administration, I think it’s tough to take the battle to U.S. stocks, at least in 2025,” said Venu Krishna, head of U.S. equity strategy at Barclays.

Signs of a growing preference for the United States emerged immediately after the November 5 election, when U.S. equity funds received more than $80 billion in the week following the vote, while funds European and emerging markets recorded capital outflows, according to Deutsche Bank.

Strategists at Morgan Stanley, UBS Global Wealth Management and the Wells Fargo Investment Institute are among those who recommend overweighting U.S. stocks in portfolios or expect them to outperform next year.

REVENUE ENGINE

America’s corporate earnings advantage is a key driver of U.S. strength: S&P 500 company profits are expected to grow 9.9% this year and 14.2% in 2025, according to LSEG Datastream. In contrast, companies in the European Stoxx 600 are expected to increase their profits by 1.8% this year and 8.1% in 2025.

“The United States remains the geographic region in the world generating the highest earnings growth and profitability,” said Michael Arone, chief investment strategist at State Street Global Advisors.

The dominant role of large technology companies in the U.S. economy and their heavy weighting in indexes such as the S&P 500 helps drive this growth. The five largest U.S. companies – Nvidia, Apple, Microsoft, Amazon.com and Alphabet – have a combined market value of more than $14 trillion, compared to about $11 trillion for the entire STOXX 600, according to LSEG data.

More broadly, the American economy is expected to grow by 2.8% in 2024 and 2.2% in 2025, compared to 0.8% this year and 1.2% next year for a group of around twenty countries. using the euro, according to forecasts from the International Monetary Bank. Funds.

Trump’s plans to raise tariffs on imports could help the United States extend that advantage, despite the risk of blowback, said Mike Mullaney, director of global market research at Boston Partners, which favors American stocks.

“If Trump imposes 10 to 20 percent tariffs on European products, they will be relatively more affected than us,” Mullaney said.

The Republicans’ continued power in Washington – which could make it easier for Trump to enforce his agenda – has prompted Deutsche Bank economists to raise their forecast for US growth for 2025 from 2.2% to 2.5%.

While tax cuts and deregulation should boost growth, the relatively narrow margins of the US Congress and the administration’s sensitivity to market reactions could limit the reach of the most “extreme” policies, such as tariffs, the bank wrote Thursday.

UBS Global Wealth Management analysts expect the S&P 500 to reach 6,600 next year, thanks to advances in artificial intelligence, falling interest rates, reductions in taxes and deregulation. The index closed at 5,948.71 on Thursday.

Still, an all-out trade war with China and other partners could hurt U.S. growth and fuel inflation. A scenario in which countries retaliate against sweeping U.S. tariffs could send the S&P 500 down to 5,100 points, even though global inventories would also fall, UBS said.

Some segments of the market could be particularly vulnerable to Trump’s policies: Concerns over plans to cut bureaucratic excesses bruised shares of government contractors last week, for example, while drugmakers fell as Trump chose vaccine skeptic Robert F. Kennedy Jr. to lead the Health Department. Health and social services.

Broad tax cuts could also raise concerns about rising U.S. debt. Deficit fears contributed to a recent selloff in U.S. government bonds, pushing the 10-year Treasury yield to a five-month high last week.

At the same time, the valuation gap between the United States and the rest of the world could become so large that U.S. stocks start to look expensive, or international stocks become too cheap to ignore.

But for now, the long-term trend is in favor of the United States, with a gain of more than 180% for the S&P 500, compared to a rise of almost 50% for the European STOXX over the last decade . “Momentum is a good thing,” said Colin Graham, head of multi-asset strategies at Robeco. “If you have something that continues to outperform, then investors will follow the money.”

(Reporting by Lewis Krauskopf in New York; editing by Ira Iosebashvili and Matthew Lewis)