The US dominates global stock markets – but will it last?

US stocks now account for 60 per cent of the FTSE All-World index, with the American market roughly 10 times the size of its closest rival, Japan. Soberingly, US dominance is so assured that the market capitalisation of Microsoft alone is almost the same as the entire UK market. 

But it wasn’t always like this. At the turn of the 20th century, the UK market dominated, with US market capitalisation far closer to French or German levels, as the chart below shows. Over the proceeding 125 years, strong economic performance, large IPO volumes and substantial returns saw the US stock market soar. Analysts at UBS think that “no other market can rival this long-term accomplishment” – and nor are rivals likely to do so in the near future.

According to the latest OECD forecasts, the US economy will grow 2.1 per cent this year, far outstripping Japan (at 1 per cent) and the UK (0.7 per cent). This should be good news for US shares: research from Schroders shows that US earnings per share (EPS) growth has an extremely high correlation to domestic gross domestic product (GDP) growth. In theory, buoyant US growth will only entrench the gulf between the size of the US market and its (currently distant) rivals. 

But developed markets are not the only contenders. Although US economic growth looks enviable from a UK perspective, it is sluggish compared with many emerging markets. Forecasts suggest that the Indian economy will grow by 6.2 per cent this year, against 4.7 per cent for China. Estimates from Goldman Sachs now imply that China will overtake the US as the world’s largest economy by 2035, with India bumping the US out of second place by 2075. This raises an obvious question: if the US economy finds itself third in the global economic league table, could the market eventually follow suit? 

Goldman's economists expect emerging markets (EMs) to gain a bigger share of global equity market capitalisation as their economies expand. According to their analysis, India will see the biggest increase in global market share thanks to its rapid economic and population growth, with China experiencing more headwinds from an ageing population. 

Overall, Goldman forecasts suggest that EMs’ share of global equity market capitalisation will double between now and 2075 to account for 55 per cent of the total. Even so, the US will remain the single biggest equity market as of that date. And EM growth won't map directly onto benchmark weightings, given index providers have their own leeway when it comes to rebalancing. 

But there are precedents for big changes in index composition. Between 1949 and 1959, Japan’s “economic miracle” saw a real return on equities of over 1,500 per cent. Stocks continued to rise for a further 30 years, leaving the Japanese equity market the largest in the world. By the 1990s, it had a 45 per cent weighting in the world market, against just 29 per cent for the US. Then the bubble burst. Between 1990 to 2023, Japan was the worst performing stock market in the world.

Looking backwards reminds us that past performance doesn’t guarantee future performance – and could even leave investors vulnerable to unhelpful biases. Analysts at UBS point out that in 1900, the Russian stock market made up 6 per cent of world capitalisation, making it the fifth biggest market in the world. This didn’t stop investors from going on to lose everything when assets were expropriated in 1917. 

The US market, on the other hand, has performed handsomely over the past 124 years, generating an annualised real return of 6.5 per cent. Yet the UBS analysis warns that only focusing on periods of strong performance opens us up to survivorship and success biases, where “investors can gain a misleading view of equity returns elsewhere or of future equity returns for the US itself”. Although US market dominance looks secure, history tells us how quickly fortunes can reverse.