It may be time for U.S. stocks to underperform their European counterparts, according to UBS global equity strategist Andrew Garthwaite. “We think that there are good idiosyncratic reasons why the US should underperform,” the strategist said in a note to clients. First, UBS thinks the global economy has reached a point that would make American companies more vulnerable. Historically, when global purchasing managers indexes rise more than 2 points over six months, the U.S. starts to underperform as it has the lowest operational leverage of any major region, UBS said, adding that PMIs are almost at the level now. Secondly, the superior growth of the U.S. to the rest of the world is disappearing, the firm said. “The US outperformed as US GDP growth was revised up sharply relative to non-US GDP growth (especially European GDP). This gap is now set to close quite sharply as US excess savings have largely been used and US immigration is likely to be peaking,” Garthwaite wrote. .SPX .STOXX YTD mountain SPX vs STOXX 600 UBS also listed the U.S. fiscal policy as a risk factor. The U.S. currently has a massive $34.7 trillion debt load. The budget deficit for 2024 is running at $1.2 trillion with four months left in the fiscal year. In 2023, the shortfall totaled $1.7 trillion. “If all of the US deficit was financed at the long end, then fiscal tightening of 4.5% of GDP would be needed to stabilize government debt to GDP. This is more than any other region,” Garthwaite wrote. “This hence carries with it one of the following: i) a US bond spread risk; or ii) a relative growth risk.” The Wall Street firm also said earnings in the near term present a hurdle for stocks, while valuation of broad equity benchmarks look stretched. The S & P 500 has outperformed Europe’s broad market index, the Stoxx 600 , in 2024. The U.S. benchmark is up 13%, while the Stoxx 600 has climbed 6.7%.
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