These are good times for stock markets on both sides of the Atlantic, but the US is way out in front.
In the UK, the FTSE 100 index of leading shares has been trading close to its record high and is up nearly 8 per cent so far this year. Across the pond, the gains are even more dramatic.
The S&P 500 is up 23 per cent, having hit fresh peaks on 44 trading days already in 2024 – one of the highest numbers on record. And the gulf between returns from the UK and US markets is growing.
Buoyant: In the UK, the FTSE 100 has been trading close to its record high and is up nearly 8% so far this year. Across the pond, the gains are even more dramatic
The FTSE 100 has notched up a 17 per cent gain over five years, but the S&P has done much better, nearly doubling in value in that time.
If dividends paid out by companies were re-invested, the FTSE 100 delivered a total annual return of 6 per cent over the past decade, according to a recent report by investment bank Goldman Sachs. That compares with 13 per cent for the S&P 500.
Some of the difference can be explained by weak company earnings in the UK, along with domestic political upheavals in the aftermath of the Brexit vote, Goldman said.
The Wall Street giant’s analysts also mentioned that unlike the US, the London stock markets do not boast a large technology sector.
Tech stocks have been behind much of the performance in the US. Much of it, however, is because UK investors including pension funds have simply shunned London-listed stocks, which has driven down their market valuations.
Indeed, foreign investors own around two-thirds of the UK stock market.
Goldman notes that the only net buyers of UK equities in recent years have been companies buying back their own shares.
Traditionally, private investors in the UK have tended to invest most of their savings in companies listed on the London Stock Exchange, not least because it is simpler and there is no risk of currencies moving against them.
Many also want to back British businesses that create jobs and prosperity here.
But, given the growing valuation gulf between the US and UK, it would be no surprise if even the most patriotic of British savers eyed their American cousins with envy – and looked for a slice of the action themselves.
‘Returns can be significant for investors able to look past their home bias,’ says Richard Flynn, UK managing director of Charles Schwab, the largest brokerage in the US.
Critics of the US stock market boom say it is highly concentrated in a few technology stocks.
That makes returns more volatile and increases the chances of a wider crash if investor sentiment turned against Silicon Valley companies such as chip giant Nvidia or sectors like artificial intelligence (AI).
The frenzy about tech in general – and Nvidia in particular – has inflated what some see as the biggest bubble in stock market history.
‘Over $10 trillion of stock market value has been created since AI-hype began,’ according to The Kobeissi Letter, an investment guide.
To put that into context, Nvidia is worth $3.4 trillion (£2.6 trillion) – almost 12 per cent of the entire US economy’s annual output – and is poised to overtake iPhone maker Apple as the world’s biggest listed company.
Losses: Think-tank New Financial found that more than 600 British firms have disappeared from the UK stock market in the past 20 years, for a variety of reasons
However, reports that the US government may limit the number of chips that can be shipped to certain countries temporarily stalled Nvidia’s advance last week – a reminder that tech stocks are not for the faint-hearted. But there is a lot more to American shares than tech stocks.
Russ Mould, investment director at broker AJ Bell said: ‘America is the world’s biggest economy,’ adding that ‘wealth and success are celebrated, not reviled’ and that ‘companies are very much run with the bottom line and the shareholder in mind’.
Americans also take a keen interest in managing their own investments and there is a much stronger culture of individual share ownership than in the UK.
A similar process is under way here. But experts warn that raising capital gains tax on share sales in next week’s Budget – or scrapping the inheritance tax breaks for shares on the junior AIM market – will do little to revitalise the London market.
Think-tank New Financial found that more than 600 British firms have disappeared from the UK stock market in the past 20 years, for a variety of reasons.
But the US has other significant advantages rivals cannot hope to emulate. And as well as having the world’s largest stock market, the US also hosts the biggest bond market.
The dollar is still the world’s reserve currency. Then there is the economy. Despite talk of recession in the summer, it is still growing at more than 3 per cent.
‘What’s not to like?’ asks AJ Bell’s Mould. Perhaps the biggest risk is that the undoubted merits of American markets are already known, and ‘priced in’ to chunky valuations. In plain terms, the problem is that US share prices are high in relation to expected streams of future profits, which means there is less chance they will soar further and more chance of them falling.
‘The last time the US stock market was so dominant in global markets was 2000, right before the tech, media and telecoms bubble burst and the technology-laden Nasdaq index plunged by nearly 80 per cent,’ Mould says.
He advises against succumbing to FOMO – ‘fear of missing out’ – and instead stick to an investment strategy that fits your overall goals. Does that mean a bet on Britain might pay off? Maybe.
Mould counts the UK among those unloved markets that could be undervalued.
Goldman Sachs agrees. The bank thinks the FTSE 100 will hit 8,800 within a year, 5 per cent higher than its current level.
Another sign of hope is that inflation is moderating. This gives the Bank of England scope to lower interest rates twice before Christmas, says Goldman.
Low interest rates tend to be good for stock markets because they reduce the returns available from no-risk savings accounts.
There are, then, reasons to be hopeful about the UK. But over the long term, investors who put a proportion of their portfolio into the US have the chance of sharing in a slice of the prosperity of the world’s biggest economy.
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