Global Equities
Stock market outlook: Broader opportunities emerge
Martin Romo
Chair and Chief Investment Officer
Andrew Cormack
Fixed Income Portfolio Manager
Caroline Randall
Equity Portfolio Manager

Even as the global economic outlook weakens, powerful tailwinds are forming behind certain areas of the equity markets that previously spent many years in the wilderness.

Chief among them are international stocks, particularly in Europe and Japan, that have surged in recent months amid a pronounced decline in the U.S. dollar. This trend is part of a larger broadening of investment opportunities over the past year — in contrast to the prior decade when large-cap U.S. tech stocks dominated market returns.

“What had been a binary market — a market that was either/or — is now more balanced,” says Martin Romo, a portfolio manager with The Growth Fund of America®. “The opportunity set has grown to include U.S. companies and international companies, growth stocks and value stocks, the technology sector and health care, industrials and energy.”

Declining dollar could boost international stocks

At least part of this dynamic has been driven by a significant reversal in the strength of the U.S. dollar. After an 11-year bull run, dollar dominance appears to be on the ropes as the greenback weakens against the euro, the yen and many other currencies. A continuing downward trend would be welcome news for investors in international stocks and bonds, where currency translation effects have eroded returns in recent years.

International stocks have rallied in periods of dollar weakness

The image shows the value of the U.S. dollar from January 1970 to May 31, 2023. It also shows how international stocks, as measured by the MSCI EAFE Index, fared against U.S. stocks, as measured by the S&P 500 Index. During times of dollar weakness, international stocks generally outpaced U.S. stocks. During times of dollar strength, U.S. stocks generally did better. From January 1970 to October 1978, the dollar declined 29% and the MSCI EAFE outpaced the S&P 500 by 81%. From October 1978 to March 1985, the dollar rose 46% and the MSCI EAFE lagged the S&P by 99%. From March 1985 to May 1995, the dollar fell 34% and the MSCI EAFE outpaced the S&P by 68%. From May 1995 to February 2002, the dollar rose 33% and the MSCI EAFE lagged the S&P by 119%. From February 2002 to July 2011, the dollar fell 28% and the MSCI EAFE outpaced the S&P by 54%. From July 2011 to October 2022, the dollar rose 42% and the MSCI EAFE lagged the S&P by 233%.

Sources: Capital Group, J.P. Morgan, MSCI, Refinitiv Datastream, Standard & Poor's. Relative returns and change in the USD index are measured on a cumulative total return basis in USD. The U.S. dollar index reflects J.P. Morgan's USD Real Broad Effective Exchange Rate Index, which is re-based to 100 as of 2010. As of May 31, 2023. Past results are not predictive of results in future periods.

Markets outside the U.S. are already showing signs of a currency boost. As the dollar slipped, European stocks generated the strongest returns among developed markets during the fourth quarter of 2022 and the first quarter of 2023. Japanese stocks, too, have staged an impressive rally — with the Tokyo Stock Price Index, commonly known as TOPIX, rising to a 33-year high in mid-May.

Since reaching a peak last October, the dollar has declined about 6%, as measured by the J.P. Morgan USD Real Effective Exchange Rate Index. While that may not seem like much, currency trends often play out over long periods of time, says Andrew Cormack, a portfolio manager with Capital World Bond Fund®. “The dollar tends to move in big cycles over many years,” Cormack explains. “And I think the strong dollar cycle we saw over the past decade was a bit long in the tooth.”

While the dollar may yet see intermittent periods of strength due to its perceived status as a safe-haven asset, Cormack believes the long-term trajectory is lower. That’s due to several factors, including a soft U.S. economy, a weak housing market and indications that the Federal Reserve may be done raising interest rates for the balance of 2023.

U.S. equities also have done well so far this year, largely thanks to a rebound in Big Tech stocks. Technology has been the best performing sector so far this year in the S&P 500 Index, driven in part by investor enthusiasm for the rise of artificial intelligence (AI) systems, such as ChatGPT. Earlier this year, ChatGPT, co-owned by Microsoft and Open AI, became the fastest growing consumer app in history.

The difference now is that tech stocks are no longer the only game in town. Other areas of the market are also enjoying time in the spotlight, suggesting the future of growth investing may be more inclusive.

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Dividend stocks rise in importance

In this environment, dividend-paying stocks may take on greater prominence, especially if global economic growth continues to slow and market volatility returns. This is also an area where international markets have had an advantage given the higher number of dividend-paying companies headquartered outside the United States and the emphasis they place on returning cash to shareholders.

For example, French drug maker Sanofi has increased its dividend payout for 28 consecutive years. U.K.-based consumer goods giant Unilever has done so for 22 straight years. While there are many solid dividend payers in the U.S., international and emerging markets tend to offer a better hunting ground. As of May 31, 2023, more than 600 companies headquartered outside the U.S. offered hefty dividend yields between 3% and 6%. That compares to 130 in the United States.

Across all markets since the start of 2022, dividend contributions to total returns have increased, as have total payments to investors. Global companies distributed more than $2 trillion in dividend payments for the 12 months ended April 30, 2023, an 8.9% increase from the previous 12.

“I expect dividends will be of greater significance to investors this year and beyond,” says Caroline Randall, a portfolio manager with Capital Income Builder®. “But in a period of relative instability and rising debt costs, it is essential to focus on the quality of dividend payers.”

The dividend decade is here

The image shows the generally rising path of dividend payments on a per-share basis from 2012 to May 31, 2023, along with consensus estimates for future increases. For the current period, the MSCI Europe Index has an implied compound annual growth rate (CAGR) of 8.7%. The MSCI USA Index has an implied CAGR of 5.9%. And the MSCI Japan Index has an implied CAGR of 9.4%.

Source: FactSet. Data for 2023 to 2025 is based on consensus estimates as of May 31, 2023. CAGR = compound annualized growth rate.

For Randall, finding quality dividend payers means closely scrutinizing company balance sheets, credit ratings and interest costs. This has guided her to select companies across the pharmaceutical and medical device industries, utilities, energy producers and some industrials.

“It is critical to track what management says about dividends and equally critical to follow what they do. If you are going to rely more on dividends, you must be confident the companies will pay them. That’s where we can add value as active managers.”

Bullish signal: A mountain of cash on the sidelines

Given these and other opportunities, now may be the time for investors to consider moving out of cash. In recent months, investors have shifted assets from stock and bond investments and driven money market totals to a record $5.39 trillion, as of May 26, 2023.

This flight to cash and cash alternatives such as money market funds and short-term Treasuries is understandable following last year’s tandem decline of stocks and bonds in the face of rising interest rates, inflation and slowing economic growth. Many investors moved deposits from banks to money markets amid ongoing volatility and relatively high yields on cash alternatives.

Investors’ flight to cash has been followed by strong returns

The image shows the fluctuation of ICI money market fund assets from 2007 to May 26, 2023, including large increases during the global financial crisis from 2007 to 2009 and the COVID pandemic starting in March 2020. On January 9, 2009, cash levels peaked at $3.9 trillion. On March 9, 2009, the S&P 500 Index hit a trough. Three months later, the S&P 500 was up 40%, and six months later, it was up 55%. On May 20, 2020, cash levels peaked at $4.79 trillion. On March 23, 2020, the S&P 500 hit a trough. Three months later, the S&P 500 was up 41%. Six months later, it was up 46%. As of May 26, 2023, money market fund assets stood at $5.39 trillion.

Sources: Capital Group, Bloomberg Index Services Ltd., Investment Company Institute (ICI), Standard & Poor’s. As of May 26, 2023. Past results are not predictive of results in future periods.

But conditions have shifted thus far in 2023, and long-term investors may want to rethink their approach. Levels of cash alternatives peaked near two recent market troughs. During the global financial crisis, for example, money market fund assets peaked two months before the S&P 500 Index reached a bottom on March 9, 2009. The stock market recorded a 40% return over the subsequent three months and a 55% return over the following six months.

Similarly, during the pandemic, money market fund levels reached a high weeks after the S&P 500 hit its trough in March 2020.

After the painful losses of 2022, more risk averse investors might consider allocating some cash to dividend-paying stocks, which provide income and capital appreciation potential, as well as select short- and intermediate-term bonds, which have been offering higher yields than in 2022. (Unlike cash which may be insured or guaranteed by the Federal Deposit Insurance Corporation, dividend-paying stocks, short- and intermediate-term bonds are not guaranteed and are subject to loss.)

Looking out across the investment landscape, short-term bonds, dividend-paying stocks and international stocks stand out for their attractive valuations and historically lower volatility, offering potentially attractive alternatives to cash for cautious investors seeking a re-entry point.

Martin Romo is chair and chief investment officer of Capital Group. He is also the president of Capital Research Company, Inc, serves on the Capital Group Management Committee and is an equity portfolio manager with 31 years of investment experience (as of 12/31/2023). He holds an MBA from Stanford and a bachelor's degree from the University of California, Berkeley.

Andrew A. Cormack is a fixed income portfolio manager with 20 years of investment industry experience (as of 12/31/2023). He holds a first-class honours degree in actuarial science from the London School of Economics and Political Science.

Caroline Randall is a portfolio manager with 26 years of experience (as of 12/31/2023). She also covers European utilities as an analyst. She holds master's and bachelor's degrees in economics from Cambridge.

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries.

MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization-weighted index designed to measure developed equity market results, excluding the United States and Canada.

MSCI Europe Index is designed to measure developed equity market results across 15 developed countries in Europe.


MSCI Japan Index is a free float-adjusted market capitalization-weighted index designed to measure the equity market results of Japan.

The S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks.

Tokyo Stock Price Index, commonly referred to as TOPIX, is a capitalization-weighted index of 2,176 large-cap companies listed on the Tokyo Stock Exchange.

J.P. Morgan USD Real Effective Exchange Rate Index is designed to measure the exchange rate of the U.S. dollar against a trade-weighted average of currencies in more than 50 countries, adjusted for inflation.

The market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.

This report, and any product, index or fund referred to herein, is not sponsored, endorsed or promoted in any way by J.P. Morgan or any of its affiliates who provide no warranties whatsoever, express or implied, and shall have no liability to any prospective investor, in connection with this report. J.P. Morgan disclaimer:

MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2023 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part is prohibited without written permission of S&P Dow Jones Indices LLC.

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