The US market has been a dominant player in global markets since the financial crisis but its power could be diminishing, according to investment commentators.
Over the past decade the US market has led global markets higher, with the S&P 500 almost doubling the returns of the next-best market.
Mark Sherlock, manager of the Hermes US SMID Equity fund, said: “From a cyclical point of view one thing the US is good at is sorting itself out from a crisis so I think it was quicker to come out of the financial crisis of 2007/08.”
Performance of indices over 10yrs
Source: FE Analytics
The mid- and small-cap manager said, for example, that US banks were quick to repair their balance sheets by removing costly home loans.
“The result of that was that they were ahead of the rest of the world so have been leading the world in terms of economic recovery, which is I think what has translated into superior stock market performance,” he added.
While this has been a tailwind for the last 10 years, it could become a headwind as other markets such as Europe and the emerging markets begin to make up the ground, potentially at a more rapid pace.
“I would say that is cyclical because other countries are now catching up and it feels more like a synchronised global recovery in a way that it didn’t three years ago when Europe was in the doldrums, [investors were] not quite sure about Asia and the US was the leader of the pack,” Sherlock said.
Paul Niven, manager of the Foreign & Colonial Investment Trust, said another reason the US market has been so strong is simply because it has better companies.
“The reason it is the dominant market is because by definition it has dominant companies that generate the largest share of earnings globally,” he said.
As well as this, these companies are on significant premiums to their global peers, meaning that the market’s dominance on global indices is inflated.
Indeed, while they may not produce more than 50 per cent of the world’s earnings, US companies make up more 52.23 per cent of the MSCI All Countries World index.
“The reason it trades on the largest premium is because of the sectoral composition,” he said, with world-leading technology companies of particular importance.
As such, Niven said that “barring some huge shock in growth terms”, it would be extremely unlikely that the US would underperform significantly enough both in terms of the economy and corporates for it to be knocked off its position as the world-leading market.
“But that doesn’t mean that other areas will not increase in importance,” he added.
“For the first time in a number of years we have got a synchronised upturn in Europe and growth looks to be sustainable. This time it may be the case that Europe is on an improving growth trend on a sustained basis.”
Additionally, he said it is entirely probable that China and the emerging markets will continue to grow as a proportion of the overall global market.
Indeed, we have begun to see this shift over the last year, with both the MSCI Emerging Markets and MSCI Europe ex UK indices outperforming the S&P 500, as the below chart shows.
Performance of indices over 1yr
Source: FE Analytics
Niven said: “A few years ago I would have said emerging markets look cheap on a secular basis but are long of stuff you don’t want to own – miners and commodities – whereas now there is a lot of domestic exposure and they are about 30 per cent in tech.
“On a normalised basis we think emerging markets offer a good upside potential on a global basis and should continue to increase as a proportion of global market cap.
“[Over the next decade] we think that the US remains the most important market but [its strength] diminishes, while other areas increase.”
Sherlock agreed, noting that the coming decade will not be like the one before and could see the US becoming less dominant than it has been (though remaining the most important market globally).
“I think structurally probably China’s influence has never been bigger and if you think of global GDP China is a serious challenger to the US in a way it never has before in my career,” the Hermes manager said.
However, he said that the death of the US has been talked about prematurely in the past as investors could have bet against the US in each of the last seven years and been wrong. 
“I think it is over simplistic to say it is a mature economy that has had its day and is full of old people who aren’t spending as much and not having as many children and that sort of thing, but I would say that it is interesting that having been the global economy there are some challengers to that.”
Despite this, Sherlock (pictured) said the US has a very good track record of competing and winning and that he “wouldn’t count it out quite yet.”
Jason Hollands, managing director of Tilney Group, is more positive on the potential for the US to continue to dominate global markets over the next decade.
He noted that the US has been the dominant force for more than just the last decade and looks set to continue being so in the future.
“The US remains the world’s largest economy but it is also the largest stock market and that predates the global financial crisis,” he said.
“Its dominance goes way back further than that and it is quite simply that the US has been the most powerful advocate of free market capitalism over a long period of time.”
Hollands noted that the US is home to many world-leading businesses, particularly in high-growth industries like technology, in a way that other markets are not and that it is the best in the world at encouraging innovation.
“If you look also at the number of leading US companies that didn’t exist 30 years ago it is very telling. The US has a culture where there is admiration for risk-takers and not the same antipathy towards wealth creation that you have seen in much of Europe,” he said.
It is therefore much easier for fast-growth, smaller companies to get access to funding and keep growing.
Additionally, while China may pose a threat in terms of its growing importance in global economic growth, the stock market remains some way off becoming the dominant force for investors.
“Could China step into that space? Possibly but I think the challenge there is really around governance and while it has adopted the veneer of market capitalism, the state is still a major player in the capital markets,” Hollands said.
“State ownership is high and many listed businesses still have state officials on their boards. That is an impediment to really embedding an entrepreneurial culture and that is the challenge for China.”