In the first two months of 2024, global stock markets were up 5%, extending a winning streak that began in late 2022. The Japanese and U.S. markets, both up 7%, were ahead of all major markets this year. European equities gained just under 4%. Technology stocks, including the well-known Magnificent Seven, are still leading the way in the U.S. In Europe and Japan, other acronyms such as “Granolas” and “Seven Samurais” have also emerged to describe standout stocks.
As we demonstrated previously, looking beyond labels and focusing on the characteristics that influence risk and return can be useful. In this blog post, we compare key fundamental attributes of the select group of stocks that has been driving returns across global equity markets.
Searching for international stars
We looked at the 10 “star” stocks in each of the MSCI Europe, MSCI Japan and MSCI USA Indexes that contributed most to their home market’s return since 2020. Familiar examples of these include Nvidia Corp. in the U.S., Novo Nordisk A/S in Europe and Toyota Motor Corp. in Japan. We elected to study the period associated with the COVID-19 pandemic because it was characterized by several shifts in investor sentiment as the impact of lockdowns and interest-rate hikes unfolded.
Ten stocks accounted for majority of returns since 2020
Despite market swings over the period, 10 stocks accounted for about 40% of each regional market’s overall return. While today’s high levels of market concentration may pose a challenge to diversification, concentration in returns has been more the historical rule than the exception. A small fraction of stocks has historically accounted for the bulk of wealth creation in listed equities.[1] In fact, we found that over the last three decades, the top 10 contributors in each region accounted for over a quarter of the market’s return.
Exposures highlight firms’ operations, fundamentals and sentiment
Thematic exposures can help reveal the structural trends and business models that affect companies — and portfolios. The U.S. star stocks had greater exposure to tech-oriented trends, particularly those related to disruptive technologies and AI-adjacent businesses such as data centers. The top-performing European companies tilted toward health care, while leading Japanese companies leaned toward robotics and industrial themes, aligning with their manufacturing prowess.
European and Japanese companies tilted toward health-care and robotics themes
This “digital divide,” and its association with favorable network effects, customer retention and platform power that many of the U.S. stars enjoy, has been a key driver for the high-growth, high-margin business characteristics that distinguish the group on its fundamentals.[2]
Stars aligned along the growth and value divide
Profit margins are just one way to differentiate each region’s stock performance. The U.S. and European stars tended to be more growth-oriented and pricier stocks, while the Japanese stars showed many characteristics of value stocks: less expensive, lower profit margins, subdued earnings outlooks and higher debt compared to the broader Japanese market.
The digital divide reflects a broader trend in which growth stocks have propelled the U.S. market since the COVID-19 pandemic and the European market since the start of this year. Meanwhile, Japan’s emphasis on shareholder-friendly reforms has elevated value stocks, resulting in expanded valuations and more-generous buybacks and dividends.
Evolution within star stocks
Exposures also highlight recent changes in business fundamentals. For instance, four of the U.S.'s Magnificent Seven stocks have surged so far this quarter, whereas the performance of the other three has fallen behind the broader market, as their price momentum shows in the following exhibit.
Fundamentals highlight growing split among US star stocks
Nvidia, Meta Platforms Inc. and Amazon.com Inc. have posted strong growth and widening margins, with investor optimism reflected in market indicators such as sentiment and short interest. In contrast, Apple Inc.’s China-related demand slowdown in mobile and Tesla Inc.’s deteriorating unit economics on electric vehicles have been reflected in their exposures.
International sales buoyed Japanese and European firms during the COVID-19 pandemic
Lastly, we looked deeper into the exporter category from the regional analysis. The prevalence of foreign sales has been a key attribute of the European and Japanese stars, such as ASML Holding NV and Toyota.[3] This distinction is important because exporters have earned higher returns in Europe and Japan since the onset of the COVID-19 pandemic.
Japanese exporters outperformed as COVID-19 lockdowns unfolded
Name recognition can be fleeting, but fundamentals have staying power
As we have shown, shifting consumption and supply patterns could benefit particular regions and countries. Japanese firms notably grew their sales in the U.S. market since 2020, likely benefiting from a weakening yen and a relatively more-aggressive post-pandemic reopening in the U.S.[4]
Labels and stock groupings may be transient, but the enduring value of thematic and fundamental analysis lies in the ability to uncover the macroeconomic and business dynamics that influence stock returns.