American stocks are up nicely year to date — the S&P 500 has gained nearly 7 percent in 2017. But markets abroad are leaving U.S. equities in the dust, and some strategists say the outperformance could accelerate.
The iShares MSCI EAFE exchange-traded fund, which tracks 962 large- and mid-cap stocks in developed markets in Europe, Australia and Asia (and excludes North America) is up nearly 11 percent year to date.
"There's momentum behind this right now. Part of what happened is after the November electoral surprise here in the U.S., we saw the U.S. rally above and beyond the rest of the world; our valuations got a little bit top-heavy, and then the rest of the world joined in on some level because there was a real relaxation of fear around Brexit that's built for a while," Max Wolff, market strategist at 55 Capital, said Tuesday in an interview on CNBC's "Trading Nation."
The stellar performance in global markets is especially pronounced this week in the wake of the French presidential election's first-round outcome last Sunday. The outcome was gauged as positive for European markets; the French CAC this week logged its best day in five years, while Italy's benchmark FTSE MIB market logged its best day in a year. The German DAX, meanwhile, has hit all-time highs.
"I think it's got a few more legs; I wouldn't bet on this to go much deeper into the year after midpoint but maybe another couple of months," Wolff said, referring to the EFA's outperformance.
The global ETF's largest country by geographical exposure is Japan, followed by the United Kingdom. Its three top-weighted holdings are all Swiss: Nestle, Roche and Novartis; Switzerland's benchmark stock market, the SIX Swiss Exchange, has gained over 7 percent this year. Financials comprise the largest sector tracked by the fund. Technology, on the other hand, comprises relatively little of the fund at just under 6 percent, while it comprises 22 percent of the S&P 500.
"As long as global financials continue to rally, the EAFE index should outperform the S&P 500. EAFE is also playing a lot of catch up to the S&P: it is only up 19.7% over the last 5 years in price terms versus 74.5% for the S&P 500. It all comes down to continued economic growth in Big Europe," Nicholas Colas, chief market strategist at Convergex, wrote to CNBC in an email Wednesday.
Furthermore, EAFE markets are cheaper than the S&P 500 on a valuation basis, Colas said. Most estimates come in around 15 times forward earnings versus 18 times for the S&P.
From a technical standpoint, global equities can continue rallying on an absolute basis, said Rich Ross, Evercore ISI's head of technical analysis. Examining a weekly chart of the EFA, Ross pointed to an 18-month base of support that began in 2015. The fund began gapping higher after the U.S. election in November, above its 200-day moving average, which indicated a bullish pattern to Ross. Still, the EFA itself is in a multiyear downtrend and may not be able to continue this strong run against the S&P 500 on a technical basis.
"When you look at that relative chart of the EFA divided by the S&P 500, which gives us that relative difference, you can see this has really been a ten-year run of underperformance," Ross said Tuesday in an interview on CNBC's "Trading Nation."
"There's nothing on the chart which tells us definitively that this 10-year run of underperformance has turned on a structural basis," Ross said.
"I'm not sure ... I'm ready to make the leap to say it's all about the rest of the world over the U.S. going forward," he said.