Woman studies financial data.
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The United States stock market has surged in value much more than the underlying economy has grown in recent decades. It’s not just more shares outstanding; prices have increased much more than gross domestic product. It’s easy to shout “Bubble!” but instead we should look at the strong growth of foreign holdings of U.S. stocks along with other fundamental factors.
The S&P 500 index stands 23 times higher than it was in 1994. The drop in long-term interest rates over this period justifies some price appreciation, as the expected value of future earnings rises as interest rates fall. But the drop in rates over this period would push prices up by about two-thirds, a far cry from the actual appreciation. GDP has increased by a factor of four, also much less than stock prices’ actual gains. We need to look elsewhere to explain the run-up of the market.
Foreign Ownership Of U.S. Stocks
Foreign ownership of U.S. stocks
Dr. Bill Conerly using data from U.S. Treasury
Foreign ownership of U.S. stocks has zoomed since 1994, as the nearby chart shows. The data come from the U.S. Treasury. Some years Treasury surveys all stock issuers and custodians, some years they extrapolate from a small sample, and some years in the past they have skipped data collection entirely. Nonetheless, the direction of the trend is clear.
Had foreign ownership of U.S. stocks held steady at the 1994 percentage, those holdings would be $14 trillion lower. That’s about 13% of the $107 trillion total market. It’s hard to say how much price appreciation came from foreign buying, but it probably was a significant effect.
U.S. Stocks And “New Money” In Other Countries
Since 1994, the “emerging economies” outside the United States have boomed. We formerly called them “less developed countries,” but whatever the label they have grown much faster than the world total. The emerging economies constituted just 18% of the global economy in 1990, but 41% in 2025, according to figures in an IMF database.
Emerging economies have grown as a share of the world economy.
Dr. Bill Conerly using data from International Monetary Fund
The newly-wealthy people in an emerging economy would likely invest differently than a person in a developed economy. Those who accumulate money in a European country might want to diversify their holdings by industry, but they might not feel highly motivated to diversify by country. They live in a fairly stable nation with a developed stock market.
But people living in an emerging country—say China or India or Vietnam—might want to diversify by investing somewhere else. Their own country’s stock market might be poorly developed, with uncertain investor protections. The investors might feel that they were already highly invested in their home country, so some diversification would protect their assets. They may not be confident that the current political regime will remain in place — or that it will stay sympathetic to business.. When people decide to diversify, they probably choose a stable country with a well-established stock market—and the United States would be the obvious choice.
U.S. Stocks And European Stagnation
Although emerging economies have grown rapidly, Europe’s rate of gain has slowed. Compared to 1994, the U.S. economy is now 2.1 times larger than it was, somewhat less than the world, which is 2.9 times larger. (The figures are adjusted for inflation.) But Europe is only 1.7 times larger. (Emerging economies are 9.5 times larger.)
A fast-growing company can be located in a slow-growing economy—but though it’s possible, it’s not the usual case. Countries where entrepreneurs develop breakthroughs in the form of new products and new production methods tend to have fast-growing businesses. A good illustration comes from the list of corporations with the largest market capitalization.
The U.S. top 10 list as of this writing is entirely tech companies, so long as we count Tesla and SpaceX as tech. The European list includes some major tech companies (SAP and ASML for example) as well as old luxury names (LVMH and Hermès), pharmaceuticals and food. There is nothing wrong with fine champagne and beautiful handbags, but they are hardly changing the world with breathtaking innovation.
The investor selecting a country or region to invest in would much more likely turn to the U.S. than Europe. That means, probably, more Europeans picking American investments. It could also mean Americans reducing their investments in European companies. (That does not show up in our statistics on foreign holdings, though it could certainly move the stock market.)
U.S. Stock Market Returns: An Incomplete Story
This focus on foreign ownership is only part of the story of the U.S. stock market. Current valuations may be too high—or might be too low. This analysis only suggests that there is fundamental reason for American stocks to have out-performed the U.S. economy in recent decades.