US companies have consistently outperformed the ROE of their international counterparts in Japan and Europe.
A team of analysts at Goldman Sachs say they have discovered the secret to US equities’ high long-term performance relative to their international counterparts.
The answer is quite simple: US company managers are more adept at getting the maximum return on each dollar of equity investment. The metric known to business school experts as "return on equity" (ROE) is calculated by dividing companies’ net income by the value of shareholders’ equity.
According to data released by David Kostin of Goldman Sachs, the investment bank’s chief US equity strategist, and his team, US companies have consistently outperformed their international counterparts in Japan, Europe, and the rest of Asia on this metric.
At the end of the first quarter, the aggregate S&P 500 corporate equity return was 20.4%, placing it in the 97th percentile since 1975. But the absolute level of returns is not as important as the change in the last decade. The US market really shines here: The S&P 500 increased its ROE by 480 basis points over that period, compared with a 370 basis point increase for European stocks included in the Stoxx 600 index and 310 basis points for Japanese stocks included in TOPIX.
It is precisely this high growth rate that has helped the S&P 500 generate annualized total returns of 7% since 2000, compared to 3% in Japan and 4% in Europe.
While Goldman’s team expects returns on US equities to continue to outpace those of their international counterparts over the long term, rapid valuation growth this year has complicated the short-term relative outlook slightly, the analysts.
“The first issue is about Generative Artificial Intelligence (AI) and the degree of disruption that innovation can cause,” Goldman’s team said.
“Investors are confident that a select few companies will generate huge profits, while the returns on AI-related capital initiatives for most other organizations are less clear. It is worth remembering that some telecommunications companies that spent a lot of money on dark fiber installations in the late 1990s failed to recover their capital investments".
As AI-related stocks have contributed most to this year’s expansion, Goldman Sachs said it expects the S&P 500 to deviate from its historical pattern and underperform in the coming year.
“High initial valuation is often seen as a barrier to strong future returns, and indeed our global equity forecasts for the next 12 months suggest the US will be lower than other regions… But the relentless focus of managers on raising ROE suggests that US equities should outperform their global counterparts over time,” said the Goldman Sachs team.
Original article published on Money.it Italy 2023-08-09 07:00:00. Original title: Il segreto delle azioni americane secondo Goldman Sachs
