The US – ahead of the pack
The strength of US equities is bewildering – as at 15 February 2024, the S&P 500 is already up by close to 6% (in US dollar terms), having already risen by 26% in 2023. This strength is all the more striking when set against the 2% increase in European equities (Stoxx 600) this year, after a rise of 16% last year – already well below that of the US index. Meanwhile Chinese equities continue their uninterrupted three-year fall.
One could be tempted to wonder whether a bubble is forming in the major technology stocks. Certainly, the rise of over 45% in Nvidia in the first weeks of the year has made a major contribution, especially after its stratospheric 230% increase last year!
But that would be jumping to conclusions. The euphoria is not restricted to the stock market – it is anchored in economic fundamentals. US growth repeatedly surprised on the upside in 2023: forecast at 0.3% at the beginning of the year, it actually came in at close to 2.5%, with a peak of close to 5%, on an annualised basis, in the third quarter. Over the same period, eurozone growth remained close to 0.5%[1] and there were no upside surprises.
And yet there were plenty of obstacles to US growth: monetary tightening, the commercial real estate and regional banking crises, deadlocks on debt ceiling discussions, household savings running low, inflation, etc.
Yet the feared slowdown did not materialise, thanks to: households’ increased recourse to debt – despite prohibitively high interest rates; the Federal government’s fiscal generosity – at the cost of a burgeoning deficit; and credit terms that were tougher but still bearable, particularly for large corporations.
Will this US miracle – and its negative mirror image in Europe – be ephemeral? Or will it crumble? This is a worry, given how excessive the euphoria around artificial intelligence (AI) looks, just like the enthusiasm a short while ago for the supposed industrial revolution that would be brought about by 3D printing.
Yet there are some fundamental reasons to believe that the miracle will persist over the medium term. Firstly, thanks to the fossil fuels that the US is extracting at higher rates than ever before. Secondly, due to more durable reasons – generative AI, in particular. IMF economists[2] estimate that generative AI is capable of supporting strong productivity gains. Indeed, it is no coincidence that productivity gains – which shrank in the US after the 2008 crisis – rebounded strongly in 2023. During the last two quarters of 2023, nonfarm productivity rose by 5% and 3.2%, respectively, on an annualised basis (based on provisional data) – remarkable rates in comparison to the average 1.7% seen since 2009. European productivity stagnated or even declined over the same period. Lastly, the US miracle could be sustained for reasons that are deeply rooted in the country’s economic governance: large-sized corporates, flexible capital allocation, open competition, a highly integrated domestic market, and pro-active public-sector investment. The opposite of each of these factors can be found in Europe, as is highlighted by Isabel Schnabel, Member of the ECB’s Executive Board, in a notable speech to the European University Institute on 16 February 2024[3].
Whilst the long-term prospects for the US thus look promising – despite some undeniable and equally profound weaknesses on the social, political and environmental front – the current euphoria of markets could herald sustainable momentum, even if those markets do look overbought in the short term. Hopefully Europe can find its own vibrant economic model and join the US at the head of the pack.
Final version of 16 February 2024 Alexis Bienvenu, Fund Manager, LFDE
[1] Bloomberg
[2] Gen-AI: Artificial Intelligence and the Future of Work, IMF Staff Discussion Notes, January 2024
[3] From laggard to leader? Closing the euro area’s technology gap, I. Schnabel, European University Institute.