The better economy doesn't necessarily make for the stronger market. For investors who have stuck with US stocks to the exclusion of European and Asian equities, the beginning of 2015 has served as a bitter reminder of that fundamental fact.
Over the first 44 trading days of the year, the S&P 500 Index has risen just 0.6 percent—with no help from an especially rough Friday session. Meanwhile, Japan's Nikkei 225, India's Sensex, and Germany's DAX have each risen some 7 percent.
Some of these gains can be pinned directly on falling currencies. As currencies like the euro and the Japanese yen weaken against the U.S. dollar, assets denominated in those currencies should be expected to increase in nominal value (given that it will take more of these weaker euros, say, to buy the same number of shares).
In "real" terms, the gains do lose a bit of their shine. For instance, the Euro Stoxx 600 is up 15 percent this year in euro terms, and 5 percent in dollar terms. Of course, that's still double the S&P's run.
"All in all, this underscores the need for U.S. investors to hedge foreign investment in a strong dollar environment," commented Win Thin, global head of emerging market currency strategy for Brown Brothers Harriman.
Yet there's more to foreign outperformance than the rapidly rising dollar. While the U.S. economy is one of the strongest in the world, expectations about what large-cap companies will earn (and earnings, after all, are what people buy stocks in order to access) are falling fast.
At the end of 2014, analysts were looking for S&P 500 earnings growth of 8.0 percent; today, the expected full-year growth is a mere 2.4 percent, according to FactSet senior earnings analyst John Butters. Even once plunging energy earnings are removed, expectations have fallen by more than 2 percent (from 11.4 percent to 9.1 percent).
At the same time, most think that America's rapidly improving employment picture will push the Federal Reserve to hike its key federal funds rate target at some point this year. This could tamp down equity gains, and further strengthen the U.S. currency (as holding dollars will become a more attractive proposition once short-term rates rise).