The volatility that began amid the August vacation rush in U.S. and global equity markets has continued into September. After a 12% rise in the MSCI World Index in the first half of this year, we believe markets will likely be flat until the end of 2024—even as they may experience plenty of volatility due to economic, political, and geopolitical uncertainty.
New realities that took shape at the start of the year—including higher for longer interest rates, elevated geopolitical risk, and megatrends rapidly transforming industries—continue to create a complex environment of evolving opportunities and risks in global markets.
Central banks have been more cautious and taken longer than expected to reduce interest rates, affecting fixed income. We see opportunities to broaden equity exposures beyond the largest U.S. names, although U.S. mega-caps, particularly the tech-exposed names, remain in a good place.
Earnings growth in the U.S., a primary driver of outperformance since the Global Financial Crisis (GFC), is decelerating. Continued uncertainty in geopolitics and economics may be impacting business and consumer confidence. That could continue to drive volatility.
After outsized returns in a highly concentrated number of U.S. large-cap tech stocks driven by AI expectations, we believe investors should diversify internationally into a broader array of companies and consider high-quality business models with attractive dividend policies.
Since the hiking cycle began in March 2022, the MSCI EAFE value index delivered returns in line with the S&P 500 through the end of August, a fact that might surprise market observers.
As rates have risen, earnings have broadened out. From the GFC to the COVID-19 pandemic, the S&P 500 delivered 4.7% EPS growth, compared with 0.7% for the Stoxx 600. From the pandemic in March 2020 to the end of June 2024, the STOXX 600 caught up, delivering 7.6% to the S&P 500’s 7.8% annualized.
Dividend-paying companies with sustainable returns on invested capital, strong cash flow generation, and a track record of capital discipline can be particularly attractive in international markets. Over the last 10 years, reinvestment of dividends has accounted for 70% of total returns for the MSCI EAFE Index, compared with 20% for the S&P 500 as of June 30, 2024. Dividends can also serve as a buffer against market drawdowns that can be sharper in international markets.
Japan is also proving to be an interesting market for investment. What has happened there in the past 12 to 24 months is astonishing—pressure from government and peer companies is driving corporate governance and structural reforms that have made large parts of the market more investable. The enhanced focus on shareholder returns and unwinding of cross-shareholdings has significantly improved the quality of Japanese companies.
The lesson in all this is that to enhance investor returns and limit downside risks as markets broaden, we believe investors should diversify, domestically and internationally.
In this slowing, risk-heightened environment, we like stocks with resilient growth potential that have reliably high margins and well-structured balance sheets. Investors should not be limited by their home markets but should seek companies from equity markets around the world that can power through cycles and continue to grow earnings.
This again demonstrates the value of taking long-term views; being active, long-term investors; and staying invested instead of trying to time the market. We continue to pursue a high-conviction, long-term philosophy in international equity income, highlighting access to global industry leaders, and we believe many foreign-based company ADRs available on US stock markets are attractive.
Alexis Deladerrière is head of international developed markets equity for Goldman Sachs Asset Management.
