A remarkable revelation from a team of U.S. equity analysts at Goldman Sachs suggests that American stocks have consistently outperformed their international counterparts due to the superior ability of U.S. corporate managers to maximize returns on equity investment. This critical metric, commonly referred to as “return on equity” (ROE), measures a company’s net income divided by the value of its shareholders’ equity.
According to data compiled by David Kostin and his expert team at Goldman Sachs, U.S. firms have consistently outpaced their competitors in Japan, Europe, and Asia in terms of ROE. While the trailing return on equity for firms in the S&P 500 index stood at an impressive 20.4% at the end of the first quarter, what truly sets the U.S. market apart is the improvement in performance over the past decade. During this period, the S&P 500 has experienced a remarkable increase of 480 basis points in ROE, surpassing the 370 basis-point increase for European stocks (Stoxx 600 SXXP, -0.62%) and the 310 basis-point increase for Japanese stocks (TOPIX 180460, +0.64%).
“The managements of U.S. publicly-traded companies have greatly enhanced shareholder returns over the past decade, surpassing their counterparts in Europe, Japan, and Asia,” stated the Goldman Sachs team.
The S&P 500’s ability to consistently expand its ROE has led to annualized total returns of 7% since 2000, far outpacing Japan’s 3% and Europe’s 4%, as reported by Goldman.
While it is expected that U.S. equity returns will continue to surpass those of international peers in the long term, the recent surge in valuations has added some complexity to the near-term outlook, noted the Goldman Sachs team.
The Triumph of Hope Over Experience in U.S. Equity Market
As U.S. equity prices continue to soar in relation to their expected earnings, portfolio managers are facing a challenging concept described by Goldman Sachs as “the triumph of hope over experience.”
Drawing parallels to the dotcom boom of the late 1990s, the Goldman Sachs team highlights the potential disruptive impact of generative Artificial Intelligence (AI). Investors are optimistic that a few select companies will yield substantial profits from AI advancements, while the returns on AI capital expenditure initiatives for other organizations remain uncertain.
It is essential to recall the lessons from the Dot Com era, where certain Telecom companies invested heavily in installing miles of dark fiber, but failed to generate sufficient returns to cover their capital costs.
Given that AI-related stocks have been the primary drivers of this year’s market expansion, Goldman Sachs expects the S&P 500 to deviate from its usual historical pattern and underperform over the next 12 months.
Although high starting valuations are often considered obstacles to robust future returns, the relentless focus on boosting return on equity (ROE) by management suggests that U.S. stocks should eventually outperform their global counterparts.
As August begins, U.S. stocks are experiencing a downturn. The S&P 500 is down 0.2% at 4,579, while the Nasdaq Composite has dropped by 0.5% at 14,269. On the other hand, the Dow Jones Industrial Average is performing relatively well, having gained 72 points or 0.2%, reaching 35,634 during the initial half-hour of U.S. trading.