A lot has been written lately about the outperformance of US stocks over European stocks. Here is a good summary.

I would add two other things to the list of possible reasons for this outperformance.

Corporate share buybacks

US corporate stock buybacks are a feature in US equities to a much larger extent than European corporate stock buybacks. For example, US corporates were given a “green light” to buy their own shares when Rule 10b-18 was introduced in 1982. The S&P Index started outperforming the DAX in the mid-1980s (Chart below, both of them indexed to 100 in 1959).

Source: Bloomberg, author’s calculations

As US buybacks increased, the outperformance became more obvious (Chart below).

Source: Bloomberg, author’s calculations

Intangible assets

A second reason for the outperformance of US stocks could be the higher % of intangible assets in US indices (Charts below).

Source: “Intangible Asset Market Value Study” by Cate M. Elsen and Nick Hill

Historically, the combined value of a company’s physical assets should equal its market value. But we know that this Tobin’s Q ratio has become a bad predictor of the stock market. Why? Because intangibles have replaced physical assets as the main factor of production. We cannot see the intangibles on companies’ balance sheets but there are ways to guess their worth (look at investments/expenditures on the income statement). According to Simcha Barkai from the University of Chicago, intangibles are worth $48Tn just in the US (that’s more than the physical value of all companies’ assets)!