Over the past decade, US shares have delivered an impressive 15.5% annualised¹ return, far outpacing global ex-US shares (7.7%) and UK shares (6.1%)². 

US share prices continued to climb to new highs in 2024, but what has driven this outperformance and can the rally continue?

US outperformance driven by earnings growth

The main reason for the US stock market’s stellar performance over the past decade has been strong growth in company earnings. This growth has primarily been driven by increasing revenues (the amount of money a company brings in). US earnings have consistently exceeded expectations, whereas earnings in other developed markets have lagged. 

Another key factor is the US stock market’s heavy weighting to the technology sector, which has outperformed other sectors over the past decade. Tech makes up 32% of the S&P 500 Index, which tracks the 500 largest US companies, compared to just 13% of the MSCI ACWI ex USA Index, an index of global companies excluding the US. This concentration has significantly boosted US returns.

Additionally, share price valuations (how much investors are willing to pay for shares based on company earnings) have expanded more in the US than in other developed markets over the past decade. 

The chart below illustrates the extent to which revenue growth and changes in valuations, among other factors, have influenced US and global ex-US stock market performance over the last 10 years. The bars show the impact of these factors on technology shares, the overall market, as well as the market excluding tech.

What has driven US outperformance?

Past performance is not a reliable indicator of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Notes: The chart shows the drivers behind the 10-year annualised returns between 30 September 2014 and 30 September 2024 for technology shares versus the broad market and versus the broad market minus technology shares; first for the US market and then for global ex-US markets. The drivers were valuation, dividend yield (payments of income by a company to its shareholders), and earnings per share broken down by profit margin and revenue growth. The following indices were used: S&P 500 Index, S&P 500 Information Technology Sector Index, MSCI ACWI ex USA Total Return USD Index, and MSCI ACWI ex USA Information Technology Total Return USD Index. 

Sources: Vanguard calculations in USD, based on data from Bloomberg, as at 30 September 2024.

Challenges ahead for continued growth

Replicating the past decade’s stellar returns won’t be easy for the US stock market. It would require unprecedented earnings growth or historically high valuations. 

We believe that if economic growth and earnings hold up, US shares can sustain their elevated valuations in the short term. Recent developments support these higher valuations. For example, many large companies borrowed money when interest rates were low, insulating them from subsequent interest-rate rises. 

However, the positive effects of growth and earnings are likely to diminish in the longer term. Ultimately, high valuations will drag down long-term returns for investors. And the dominance of the technology sector, driven by hopes about the impact of artificial intelligence (AI), is unlikely to continue. Instead, our research suggests that it is likely that while AI transforms the economy, we will see increases in growth and productivity across sectors.

For these reasons, our 10-year outlook suggests US shares will underperform global ex-US shares. We expect annualised returns of 2.9%-4.9% for US shares³ over the next decade. This compares with 5.7%-7.7% for UK shares, 7.4%-9.4% for developed markets excluding the US and 5.3%-7.3% for emerging market shares⁴. Our 10-year expectation for global shares, of which the US represents 67%, is 4.3%-6.3%⁵.

What does this mean for investors?

Looking ahead, the challenge facing investors is that the most attractive regions from a valuation perspective – those that are undervalued and therefore might be expected to deliver above-average returns – are also most exposed to shifting economic policy risks. For example, emerging markets and Europe have low valuations but are most exposed to US trade policy. 

It’s also important to note that even if a region or sector is undervalued, it can remain so for some time, often years. Similarly, a region or sector may remain overvalued for an extended period.

This is one of the key benefits of having a global portfolio that spreads your money across different asset types, regions and sectors. It saves you from trying to time the markets, which is a strategy that rarely pays off. It also means you can benefit from regions or sectors that perform well, offsetting those that perform less well.

By diversifying your investments, you can better navigate the uncertainties and take advantage of opportunities as they arise.

¹ Annualised returns show what an investor would earn over a period of time if the annual return was compounded (i.e. the investor earns a return on their return as well as the original capital).

² Returns measured by the S&P 500 Index, the MSCI ACWI ex USA Index and the MSCI UK Index, from 30 September 2014 to 30 September 2024. Vanguard calculations in GBP, based on data from Refinitiv, as at 8 November 2024.

³ US shares are represented by the MSCI USA Total Return Index Sterling.

⁴ UK shares are represented by the MSCI UK Total Return Index, developed market ex-US shares are represented by the MSCI World ex USA Total Return Index Sterling and emerging market shares are represented by the MSCI Emerging Markets Total Return Index Sterling.

⁵ Global shares are represented by the MSCI AC World Total Return Index Sterling.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

Important information

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This is designed for use by, and is directed only at persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

The information contained herein is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

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