1 Earning growth differentials refers to US companies whose profits are growing at the same pace as foreign companies.
2 MSCI USA Index is a free float-adjusted market capitalization index that is designed to measure the performance of the large and mid cap segments of the US market.
3 MSCI ACWI ex USA Index is a broad-based, unmanaged, market capitalization weighted, total return index that measures the performance of both developed and emerging stock markets, excluding the US.
4 Earnings Per Share is the projected growth rate in earnings per share for the next five years.
5 Price/Earnings (P/E) is the ratio of a stock’s price to its earnings per share.
6 Return on Equity is the average amount of net income returned as a percentage of shareholder’s equity over the past five years.
7 “Peak-Profit Margins? A US Perspective.” Bridgewater, February 2019
8 The CAPE ratio is a valuation measure that uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle.
9 S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.
Appendix: We compute the market cap weighted implied and forecast growth for the MSCI USA index and the MSCI AC World ex US Index. We compute the spread between these measures as the MSCI USA Index minus the MSCI AC World ex US Index. We trim the growth metrics at 5th and 95th percentile to reduce the impact of outliers. We extract the implied growth from the Residual Income Valuation Model – this is the short-term growth rate which if applied to consensus earnings forecasts results in the current valuation. The key assumptions in this model are the cost of capital which is the measure we use to discount future earnings back to present value and the time periods over which we expect a company’s growth rate and profitability will deviate from the market. 3 Year Forecast Annualized Growth is the growth rate over the next 3 years based on IBES Consensus Estimates.
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Important Risks: Investing involves risk, including the possible loss of principal. • Foreign investments may be more volatile and less liquid than US investments and are subject to the risk of currency fluctuations and adverse political and economic developments. These risks may be greater for investments in emerging markets. Diversification does not ensure a profit or protect against a loss.
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