Is U.S. Exceptionalism Real?

U.S. exceptionalism is a term that describes the persistent and prolonged outperformance of U.S. stocks and GDP in recent decades. But is it really true? Especially for stocks? 

Today’s first chart shows the performance of Europe and U.S. stocks over the past 20 years. Based on MSCI indexes, we can see that U.S. stock prices have increased 4-fold. In contrast, European stocks have barely doubled and are still below levels in 2007, before the global financial crisis. 

Chart 1: Comparing U.S. and European stock prices over the past 20 years, in USD 

At first glance, this story seems to be true. U.S. stocks have significantly outperformed stocks in Europe. 

Given how competitive and global markets are, that doesn’t seem very efficient. With so many large companies now global companies and trade such a large part of supply chains, you wouldn’t expect where a company is based to make that much difference to its growth and returns. 

Dividends make a bigger difference to European stock returns 

So-called “price indexes” that we commonly look at for daily returns only tell around half the story over a longer timeframe. 

Long-term investors should instead look at “total return” indexes that add back dividends. 

We can see the important impact that dividends can have on an investor’s savings – especially over such a large timeframe. In fact, total return indexes (that include dividends reinvested) in the  

• U.S. returned 250 percentage points more than price indexes 

• Europe tripled the gains of price indexes 

Chart 2: Stock returns including dividends are higher (past 20 years, in USD) 

Based on these data points, we can decompose stock returns into capital gains and dividends over this time. The results show that, on average, dividend yields in Europe are higher than in the U.S. In fact, based on our calculations, that difference is around 1.5% per annum. 

Chart 3: Investors receive a different mix of capital gains and dividends in each region (2003 – 2023) 

Currency can make a difference, too 

The other thing that distorts our U.S. perception of European stock returns is the impact of the FX rate changing. 

Since 2008, the Euro has weakened versus the U.S. dollar, from a high of 1.57 USD per EUR to less than 1 USD per EUR less than a year ago — a fall of around 60%.  

That, of course, makes European stocks bought in 2008 worth less now (in USD) even if their prices in Euros have not changed. In short, returns on foreign assets depend on where you live, thanks to the impact of currency changes on unrealized gains. 

Since the 2009 market lows, we can see how the EUR devaluation trend has affected relative returns on European stocks, including dividends. They have: 

• Gained over 350% in Euro  

• Gained around 300% in USD 

This shows how different European stock returns are from a European and American investors’ perspective. 

Chart 4: Total return indexes in “local” currency (USD for the U.S., EUR for Europe) since 2009 market lows 

Stock composition makes a difference, too 

Of course, even after adjusting for FX and Dividends, U.S. stocks have still beaten European stocks over the past 20 years. 

One reason is the growth of some of the old tech stocks, which have since become some of the most profitable companies in the world. We can see the impact of that by comparing the total returns of U.S. indexes to each other.  

Over the past 20 years, we can see that the Nasdaq Composite® has significantly outperformed the S&P 500, which has also significantly outperformed the older and less diversified Dow Jones index. 

Chart 5: Comparing U.S. total returns across major benchmark indexes 

One key reason for that is the performance of some of the largest stocks listed on Nasdaq. In fact, since 2018, we have seen seven different companies pass the $1 trillion market cap threshold, with Apple and Microsoft reaching close to $3 trillion despite the headwinds caused by rising interest rates since 2022. 

Chart 6: Market cap gains of the seven largest U.S. stocks 

There are a lot of factors that add to long-term portfolio returns 

There are some lessons from this simple analysis. One is to be careful looking at price indexes over a very long timeframe, as they don’t tell the whole story about stock returns. Another is to be aware that returns in your own currency might be different from what local investors experience. 

We also see how portfolio construction matters. Different countries, sectors and stock selections can impact returns over a very long timeframe. But we also see periods in each chart where outperformance reverts too. 

Most importantly, though, this analysis shows the power of compounding and the benefits of holding stock investments for years in order to build long-term wealth. 

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US Markets

Phil Mackintosh

Nasdaq

Phil Mackintosh is Chief Economist and a Senior Vice President at Nasdaq. His team is responsible for a variety of projects and initiatives in the U.S. and Europe to improve market structure, encourage capital formation and enhance trading efficiency. 

Read Phil's Bio