US investors are searching overseas for opportunities

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By Krystal Hur • Thursday, August 3

Good morning. In today's newsletter: US investors are searching overseas for opportunities. Plus, Fitch tells CNN why it downgraded America now.

US stock futures are pointing lower, after Wednesday's sell-off triggered by Fitch's downgrade of US debt. Markets in Europe are lower. Asia also mainly closed with losses but China's Shanghai Composite bucked the trend.

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What's happening now in markets:

▼ Dow Futures 35,361.00 (-0.12%)

▼ S&P 500 Futures 4,528.00 (-0.21%)

▼ NASDAQ Futures 15,419.00 (-0.35%)

▲ 10 Year 4.145%

▼ Gold $1,970.80 (-0.00%)

▲ WTI Crude Oil $79.53 (0.00%)

▼ Bitcoin $29,136.00 (-0.09%)

Fear & Greed Index

Greed is driving the US market

MARKET DATA AS OF 7:24 AM ET

MARKET FLASH

US investors are searching overseas for opportunities

Despite the gains in US stocks this year, some investors are looking for opportunities elsewhere.

Investors reduced their holdings of US equity mutual funds and exchange-traded funds by $7 billion, while adding $56 billion to their non-US counterparts this year through July 26, according to Goldman Sachs.

That's despite what's been shaping up to be a banner year for the US stock market — at least prior to this week's US credit rating downgrade (more on that below).

The benchmark S&P 500 index has gained about 18%, pushed up by artificial intelligence excitement, a strong economy and optimism that the Federal Reserve is nearing the end of its rate-hiking cycle.

But some investors say that cheaper valuations for non-US stocks, compared to their domestic counterparts, are enticing some on Wall Street to look for deals overseas.

The S&P 500 index currently trades at about 19.6 times its expected earnings, according to FactSet. In comparison, Europe's Stoxx 600 index trades at 12.9 times its expected earnings, Hong Kong's Hang Seng index at 9.6 times and Brazil's Bovespa index at 8.3 times expected earnings.

"If you missed the first half of the US equity market rally, things are pretty expensive," said Adam Turnquist, chief technical strategist at LPL Financial.

Global stocks could see support from the greenback's declining value this year. China's attempts to reignite its stalled economy could also provide a welcome boost.

International stocks have tended to be value-oriented for the past decade, meaning they have traded at relatively low prices compared to their earnings and growth potential. For investors who have cash in the US market, where the rally has been concentrated mostly in growth tech stocks, searching outside the country can help broaden their portfolios.

Jimmy Lee, chief executive of The Wealth Consulting Group, says that he's bullish on global stocks, especially as the market's rally continues to broaden out from tech.

"I think capital could continue to flow overseas," he said.

Still, history doesn't exactly bode well for international stocks. The MSCI All Country World ex USA index, which tracks the performance of large- and mid-cap stocks in developed and emerging markets, has underperformed the S&P 500 for eight of the last 10 calendar years.

That trend, at least for now, is on pace to continue this year. That MSCI All Country World ex USA index has risen roughly 9% on a US dollar basis, underperforming the S&P 500.

VOICES

Fitch's downgrade may be a black eye but not much more

"Treasury Secretary Yellen described [the data Fitch used] as 'outdated,' and that is very likely the market's stance too."

JAMIE DUTTA, VANTAGE MARKET ANALYST

Read more from CNN Business

ECONOMY FLASH

Fitch tells CNN why it downgraded America now

Fitch Ratings is defending its controversial decision to downgrade the US credit rating by pointing to the nation's mountain of debt.

"The numbers speak for themselves," Richard Francis, the lead analyst on US sovereign ratings at Fitch, told CNN's Matt Egan in an interview on Wednesday. America's debt makes up 113% (and growing) of its economic output, which Francis called "clearly pretty alarming."

Francis, who leads the committee that decided to remove America's perfect credit rating, expressed concern about large and growing fiscal deficits and the mounting cost to finance US debt as interest rates rise.

Within minutes of Fitch's downgrade on Tuesday evening, the White House, Treasury Department and some leading economists slammed the move. Treasury Secretary Janet Yellen described the downgrade as "arbitrary and based on outdated data," noting progress in many of the indicators Fitch relies on.

Former Obama economic adviser Jason Furman called the downgrade "completely absurd," and famed economist Larry Summers described it as "bizarre and inept," noting the move comes just as the US economy looks stronger than anticipated.

In response, Francis said Fitch based the decision on much broader forces than the trajectory of the economy over the next few months.

Read more here.

UP NEXT

Earnings from Apple, Amazon, Airbnb, Kellogg, Planet Fitness and Papa John's.

Plus, US mortgage rates at 12 p.m. ET.

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WHAT WE'RE READING AND WATCHING

▸ Fitch downgrades mortgage giants Fannie and Freddie to AA+ (CNN)
▸ Hyundai just reinvented the glove compartment. Here's how (CNN)
▸ How the IRS plans to deliver faster refunds to millions of taxpayers (CNN)
▸ MrBeast sues to shut down ghost kitchen-produced MrBeast Burger (CNN)
▸ Tired of dating apps, some turn to 'Date-Me Docs' (NYT)

FINAL WORD

What do experts have to say about Fitch's downgrade?

Fitch Ratings on Tuesday downgraded its US debt rating, from the highest AAA rating to AA+, citing "a steady deterioration in standards of governance."

The 10-year and 30-year Treasury yields on Wednesday rose to their highest levels since November 2022, while stocks saw a steep sell-off.

Here's what some experts have to say about Fitch's downgrade, and what it means.

▸ Sam Stovall, chief investment strategist at CFRA: "Despite a potential near-term soft patch for equities in the period ahead, we don't see 2023 as a repeat of 2011, which turned a four-month S&P 500 pullback of 8% into a six-month 19.4% collapse after S&P's debt downgrade."

▸ Lawrence Gillum, chief fixed income strategist at LPL Financial: "While not necessarily wrong in its assessment, the rating downgrade will likely not have an impact on U.S. government debt or markets broadly. The U.S. remains the safe haven during times of market stress and the downgrade will likely not change that."

▸ Fawad Razaqzada, market analyst at StoneX: "All told, the risks are skewed to the downside in the short-term outlook. With some investors likely to sit on their hands ahead of Friday's US employment data and earnings from giants Apple and Amazon on Thursday, we may see the correction get a bit larger in light of the Fitch downgrade."

▸ Marc Dizard, chief investment strategist at PNC Asset Management Group: "While this is a noteworthy news event, the Friday jobs number is likely to quickly overshadow the Fitch news, as this labor datapoint will have broader implications for the path forward on inflation expectations as well as Federal Reserve (Fed) monetary policy decisions."

▸ José Torres, senior economist at Interactive Brokers: "In the immediate term, the downgrade is likely to impact markets and interest rates at the margin, but if other rating agencies follow suit, Treasury yields could rise much more significantly, which would increase borrowing costs for the US and corporations."