Market sentiment is turning cautious as several risk factors come into focus for the fourth quarter, but for the moment the lofty year-to-date performance premium for US shares relative to the rest of the major asset classes endures.

Using a set of ETF proxies, American equities are the upside outlier for global markets. The Vanguard Total US Stock Market Index Fund (VTI) is ahead by 13.0% so far in 2023 through Friday’s close (Sep. 22). The next-best performance is a distant 7.9% gain for developed-markets stocks ex-US (VEA).

Meanwhile, several components of global markers remain underwater, including US real estate investment trusts (VNQ), which are currently posting the deepest loss for the major asset classes via a 4.1% decline.

For context, note that the Global Market Index (GMI), maintained by CapitalSpectator.com, is up 8.4% in 2023 — ahead of everything except US stocks. This unmanaged benchmark holds all the major asset classes (except cash) in market-value weights via ETFs and represents a competitive measure for global multi-asset-class portfolio strategies.

Part of the reason why US shares have performed so well is a resilient economic foundation. Despite widespread expectations earlier in the year that a recession was approaching, US output has continued to grow. As noted last week, CapitalSpectator.com’s median nowcast for third-quarter GDP, based on several sources, currently tops 3% — a solid improvement over the 2.1% gain reported by the government for Q2.

However several risk factors are brewing for Q4 and threaten to create stronger headwinds for the markets and the economy. As The Wall Street Journal reports today: “Among the possible challenges this fall: a broader auto workers strike, a lengthy government shutdown, the resumption of student loan payments and rising oil prices.” Gregory Daco, chief economist at EY-Parthenon says “It’s that quadruple threat of all elements that could disrupt economic activity.”

Nicholas Sargen, an economic consultant for Fort Washington Investment Advisors, adds that in the longer run the US faces challenges related to government spending. “Looking ahead, the biggest challenge will be to wean the economy off massive increases in government spending,” he predicts. “Over the past 15 years, the ratio of government debt to GDP has doubled from 60 percent to 120 percent.”

It’s unclear how soon, if ever, the US fiscal imbalance will create trouble for the stock market. Meanwhile, American equities continue to outperform. Even for analysts who think a US recession is still a risk for the near term, leadership in US companies remains a hardy perennial so far.

“With earnings season only a few weeks away, we’re not seeing a lot of companies adjusting their earnings and revenue goals lower,” says Kim Forrest, founder and chief investment officer at Bokeh Capital Partners. “We don’t know when the recession is coming — eventually it will — but the largest US companies aren’t signaling an immediate threat.”

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