First, 5 of the top 7 occupy oligopolistic or effective monopolistic positions in their respective industries which facilitates supernormal rofits etc. There's very few monopolies in Europe due to effective competition law enforcement which simply doesn't exist in much of the world.
Firms may have economic moats but this doesn’t make them monopolies, or necessarily facilitate supernormal profits. Both the USA and the EU fine companies that infringe competition law. However, many would regard the fines imposed by European competition law on American tech companies operating in Europe as more akin to a tax for access to the market. It will be interesting to see how the incoming administration in the USA responds to this issue.
Second, around 60% of American adults own stocks while around 15% of Europeans do. Ignoring cross border investment, there's just far more money going into the US stock markets which inevitably inflates them more than US stocks.
Money goes into stocks only when companies provide the return required by investors. Otherwise they don’t invest. And as I pointed out in post # 47 above, US firms have higher operational efficiency than Europeans. This allows them to provide a greater return to their investors while still retaining income for reinvestment, lowering debt, etc. This is why people invest in them.
If stock prices were inflated for reasons unrelated to firms’ operational efficiency, short-sellers will just pile in and force prices down.
Europeans tend to keep their money in the bank not the stock market- it's a problem which has been attracting a bit more attention recently.
On Europeans tending to keep money in the bank, you are correct. But this may be due to European firms not providing adequate returns to investors, i.e. the're are just better firms in the USA and a better fiscal and public policy environment for investors. A recent statement by Mario Draghi on the EU Capital Markets Union covered this point.
Draghi urges reform, investment drive to revive EU . But Mr Draghi also pointed out a GDP gap has opened up between the US and Europe thanks to a slowdown in productivity, which to me implies that,
inter alia, American firms are just better than European ones, i.e. more productive, higher returns on investment, etc., and therefore will attract more investment.
a bit more sober reading regarding the S&P 500 , between year 2000 and 2010 the S&P500 had a lost decade and investors actually lost money in real terms.
In the year 2000, Shiller CAPE ratio for the S&P 500 reached a peak of around 44.2, which implies lower future returns. A prudent investor would not have invested in eh S&P 500 index at that time, or would have invested but expected lower returns.
Today’s Schiller CAPE ratio for the S&P500 is 38.5. Historically, the average annualized growth rate for the S&P 500 when the CAPE ratio is around 38.5 has been approximately 1.01% . So, invest in the S&P500 today and you can expect this return, but you are investing in better run firms that operate in a better public policy and taxation environment.
