U.S. dominance of the global stock market has reached unprecedented extremes. Is it time to look for bargains abroad?

In the note, Manish Kabra, SocGen’s head of U.S. equity strategy, listed seven reasons to support his view.

They include:

• “S&P 500 profit cycle is outperforming the global cycle.”

• “Most importantly, SG Global Cycle indicator continue to show more positive EPS surprises to come for the cash-rich S&P 500.”

• “Nasdaq-100 (tech-heavy and now half of the S&P 500) profit cycle is at all-time highs and at sharp contrast with the sluggish US Small-caps (Russell-2000).”

• “Do not be carried away by weak breadth of the market where S&P 500 equal weighted and US small (Russell-2000) are down this year.”

• “The breadth of equities will improve only with small-cap participation, which in turn needs Fed rate cuts of 100bps; Those looking for small-caps should do so via our quant teams’  small-cap ex-junk.”

• “U.S. bonds should be not be an hinderance for S&P 500: we are underweight bonds, but, we do find value in US 10yr on yields > 5% (see last month’s Conviction Thinking, When tail risk becomes base case for bond market).”

• “Higher for longer = extremes become more extreme.”

One of the defining characteristics of the rally in the S&P 500 index so far in 2023 has been the performance of the Magnificent Seven, a group of mega-cap technology stocks that have driven virtually all of the S&P 500’s
SPX
year-to-date gain, and much of the increase in the Nasdaq-100.

As Kabra points out, tech stocks’ relentless march higher has pushed the ratio between the Nasdaq 100
NDX
and small-cap stocks to record levels. With the Federal Reserve promising the keep interest rates elevated into next year, there’s scope for these “extremes” to become even more extreme.

U.S. stock-market breadth has recovered since the start of November, with the Russell 2000 up more than 8% since Nov. 1, according to FactSet data.

But tech stocks have continued rallying as well. And as long as more stocks joining in the rally occurs without a material rotation out of big tech, the U.S.’s weighting in the global equity market should only increase.

The outlook for U.S. corporate earnings is looking strong, making a shift away from U.S. leadership unlikely. Since the beginning of 2023, the S&P 500 has risen more than 17%, according to FactSet data. That’s compared with a 12.3% gain in the MSCI AC World index
UK:XMAW.

To be sure, not everyone on Wall Street agrees. Bank of America Corp.’s Michael Hartnett has advised clients to search for opportunities abroad instead of pouring more money into Big Tech. Meanwhile, Richard Bernstein, chief investment officer of Richard Bernstein Advisors, recently crowed about a “once in a generation opportunity” for investors looking for bargains abroad.

See: Wall Street veteran sees ‘once in a generation buying opportunity’ in unloved areas of global stocks