It is understandable that U.S. investors want to maintain a home bias given strong outperformance and higher profitability of U.S. large caps. But there are growing concentration and valuation risks with maintaining a U.S. home bias which can be mitigated by expanding the home-front and investing beyond the concentrated U.S. large cap indices. We believe a broader breadth of investment opportunities exist internationally, and even within the U.S. home market, where investors need not sacrifice quality for more market diversity and less expensive valuations.
U.S. Large Cap Stocks, as proxied by the S&P 500, have outperformed world markets since the bottom of the 2008-09 Great Financial Crisis through 2/29/2024.
The outperformance of U.S. stocks over the rest of the world for the last 15-year period can be explained by the widened profitability gap (return-on-equity or ROE) of U.S.-based companies versus their international peers. With a diverse and highly profitable market to invest in, it is understandable why many U.S. investors maintain a U.S. home bias in their equity programs. Yet, relative valuations, as measured by price/earnings multiples, have also widened between the U.S. and the rest of the world commensurate with the widening gap in profitability.
Investing in the S&P 500 translates into investing across a narrower, more concentrated market, dominated by a handful of companies and industries. The post-pandemic period has witnessed an increased concentration of market value assigned to a handful of mega-cap companies as the valuation gap between the largest companies relative to the rest of the market has grown to levels not seen since the Great Depression.
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Advisory services are offered through Freedom Investment Management Inc. (“Freedom”), a registered investment adviser. Investment strategies carry varying degrees of risk, including the total loss of principal. Freedom does not provide tax or legal advice.
While Freedom believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. This material reflects the opinions of Freedom and is an assessment of the market environment at a specific time. This is not intended to be a forecast of future events or a guarantee of future results.
This should not be considered a recommendation to buy or sell individual securities, nor should this information be relied upon as research or investment advice regarding any security in particular. Diversification does not ensure a profit or protect against loss.
Except as otherwise specifically stated, all information is as of March 26, 2024.