Angling for Growth Potential and Income? US Markets Offer Multi-Asset Investors Both

07 February 2024

4 min read

Karen Watkin, CFA| Portfolio Manager—Multi-Asset Solutions

Edward Williams| Investment Strategist—Multi-Asset Solutions

The US can be an expansive single source of long-term growth potential and income.

With their unrivaled depth and breadth, US capital markets lend themselves well to multi-asset strategies. The sizable universe across both equities and fixed income offers not only diversification but a possible one-stop source for long-term growth and income potential.

US Equities: A Vast Source of Long-Term Growth Potential

Stocks are a good example. US equities have outpaced those of other developed markets over the past decade (Display 1). The US also hosts the bulk of the world’s most profitable growth-oriented companies, which have returned an average of almost 15% annually, a substantial margin over the 4.3% for non-US stocks.

The forces driving US companies’ extended stretch of outperformance? They’ve managed to grow their profits, revenues and cash flows—factors investors tend to reward over time—more consistently than non-US firms. They also have a strong tendency to boost growth by reinvesting capital in their businesses.

US Equity Markets Have Outpaced Other Countries in the Last Decade, Driven by Persistent Earnings Growth

US growth stocks led with a 15% average annual return, and a 9.5% annual rate of corporate earnings growth.

Past performance does not guarantee future results.
US growth stocks: Russell 1000 Growth Index; US equities: S&P 500 Index; global equities ex US: MSCI World ex USA Index
As of December 31, 2023
Source: Bloomberg, MSCI, Russell Investments, S&P and AllianceBernstein (AB)

We think US equities’ upward momentum has staying power, given four secular trends likely to favor US companies in coming years.

For example, growing digitalization through AI and other innovations should drive secular growth across US industries, reaching well beyond tech. Moreover, the US appears well positioned to adapt to big changes from deglobalization, aging populations, climate change and other forces affecting trade, productivity and sustainability.

But building a diversified equity allocation also means tapping into other exposures that can help temper volatility while filling important roles and expanded opportunities.

Income generation, for example, is also important to many multi-asset investors. Reinvesting capital has helped drive growth, but dividend-paying stocks are often better equipped to enhance income potential. For example, the Russell 1000 Growth Index yielded just under 1% annually for the decade ending December 31, 2023, compared with the 3.7% yield for the MSCI World High Dividend Index at the end of 2023.

US Bond Market: A Vast Resource for Income Seekers

Dividend-paying companies can be an effective source of equity income, but the US bond market can do the income heavy lifting in a multi-asset strategy. At a whopping $17 trillion in size, it dwarfs other regions (Display 2), with its diverse universe of investment-grade, high-yield and securitized issues that offer attractive yield across an array of sectors.

Size of US Corporate Bond Market Overshadows Other Regions

The $17 trillion US fixed income market is over four times the size of Europe’s and nearly 20 times that of Asia.

Past performance does not guarantee future results.
US corporate bonds: Bloomberg US Corporate and Bloomberg US Corporate High Yield indices; US securitized bonds: Bloomberg US Securitized Index; European bonds: Bloomberg Pan-European Index; Asia-Pacific bonds: Bloomberg Asia Dollar Index and Bloomberg Asia Pacific Securitized indices.
HY: high yield; IG: investment-grade
As of December 31, 2023
Source: Bloomberg and AB

With yields still elevated in the US after an intense cycle of rising interest rates, we’re optimistic about the potential for bonds in 2024 and their income-generating prowess. Combining them with equities in a multi-asset approach can be an effective way to harness income and growth potential while tempering volatility.

Pursuing an Optimal Asset Mix for the Long Run

Multi-asset strategies involve more than combining growth stocks with high-yield credit in equal weights. But over the past 10 years, a straightforward 50/50 mix has delivered a higher risk-adjusted return than the S&P 500 Index, with more than three times the income (Display 3, left).

This combination also offers broader diversification across complementary business types. Growth equities, for instance, tend to be tech-heavy, while US high-yield bonds are inherently more cyclical, typically with greater exposure to areas like energy (Display 3, right). The result: a better balance of companies that can outperform in different economic and market environments.

Diversification Improved Yield, Lowered Volatility and Expanded Reach

A 50/50 mix outpaced 100% stocks on a risk-adjusted basis while high-yield bonds as a stock proxy improved sector exposure.

Past performance does not guarantee future results.
Risk-adjusted return is determined by dividing returns by their standard deviation.
US growth stocks: Russell 1000 Growth Index; US high-yield bonds: ICE BofA US High Yield Index; US equity: S&P 500 Index
HY: high yield
As of December 31, 2023
Source: Bloomberg, ICE Data Indices, Russell Investments, S&P and AB

Improving Outcomes Through Careful Selection and Flexibility

A diversified strategy is a solid anchor, but a multi-asset approach should be fluid to improve outcomes and manage risk. This is especially important because growth equities and high-yield bonds—although diversifying to one another—are both generally considered higher-risk assets.

Active multi-asset investing entails staying flexible and thinking broadly. For example, US growth stocks are key contributors to long-term outperformance. But because they add downside risk, so we think there’s a benefit to tapping into other areas of US equities. Among them, low-volatility equities—companies less subject to wide price swings—may improve portfolio stability over time, and with less drain on growth potential if they’re carefully selected.

The same is true for fixed-income allocations, where broader exposure across sectors and credit quality can help diversify without substantially degrading yield or income.

Staying flexible while investing across US capital markets is the final piece of the puzzle, given how fast asset leadership can change. The US may be one country, but it singularly offers ample options for multi-asset investors to pursue an attractive balance of growth and income while managing portfolio risk.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams, and are subject to change over time.

About the Authors

Karen Watkin, CFA

Karen Watkin is a Senior Vice President and Portfolio Manager for the Multi-Asset Solutions business in EMEA. Along with being Portfolio Manager for the All Market Income Portfolio, she is responsible for the development and management of multi-asset portfolios for a range of clients. From 2008 to 2011, Watkin was portfolio manager for the Index Strategies Group, responsible for the development and management of AB’s custom index strategies for institutional clients in EMEA. She joined the firm in 2003, after spending three years as a management consultant in the Capital Markets Group at Accenture. Watkin holds a BA in economics with European study from the University of Exeter and is a CFA charterholder. Location: London

Edward Williams

Edward Williams is a Vice President and Investment Strategist within the Multi-Asset Solutions team, where he is responsible for the business development of AB’s Luxembourg income-thematic multi-asset strategies. Williams joined AB in 2020 when he was based in Hong Kong, supporting client activity across Asia, before relocating to London and into his current role. Prior to joining AB, Williams spent six years working at Fidelity International across a range of roles in Europe and Asia, including as an investment specialist, focusing on Fidelity’s risk-managed and outcome-orientated multi-asset solutions. He holds a BA in economics from the University of Reading. Location: London

Angling for Growth Potential and Income? US Markets Offer Multi-Asset Investors Both

US Equities: A Vast Source of Long-Term Growth Potential

US Bond Market: A Vast Resource for Income Seekers

Pursuing an Optimal Asset Mix for the Long Run

Improving Outcomes Through Careful Selection and Flexibility

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