Home bias is getting expensive

Over the five years to 31 October 2026, the S&P 500 returned 13.5 per cent a year in Australian dollar terms, against 8.0 per cent for the S&P/ASX 200. Among smaller companies the divergence is wider still: the S&P Small Cap 600 returned 7.6 per cent a year, compared with just 3.3 per cent for Australia's Small Ordinaries. 

A gap of more than five percentage points a year, sustained over five years, is substantial. The question for investors is what has driven it, and whether that divergence is likely to continue.

The sector story is only the surface

The usual explanation is one of composition. The US index is built on technology; the Australian index on banks and miners. Technology now accounts for around 40 per cent of the S&P 500, compared with just 2 per cent of the ASX 200, where financials and materials together represent almost 60 per cent of the market. 

The US has been the major beneficiary of the exceptional growth of its largest technology companies: S&P Dow Jones Indices estimates that the Magnificent Seven accounted for approximately 55 per cent of the S&P 500's total return between 2023 and 2025. Australia, by contrast, remains substantially exposed to domestic credit, the housing market and the global commodity cycle.

If this were simply a matter of composition, it would be reassuring, because composition is cyclical, and cycles turn. But in our view, what has largely been a divergence in market composition is increasingly becoming a divergence in underlying economic potential.

Productivity is the real engine

At the centre of that potential is productivity, and here the two economies have genuinely parted ways. Since March 2024, US labour productivity has risen 5.3 per cent, while Australia's has declined. Productivity is what allows an economy to grow without simply adding workers or extracting more resources, and it is increasingly where the two countries differ.

The clearest driver is the scale of capital being deployed into artificial intelligence. J.P. Morgan estimates that the major US technology companies are on track to spend almost US$800 billion on capital expenditure in 2026, roughly ten times their 2019 spending. This is no longer only a market story. Federal Reserve data indicates that AI-related investment contributed around 1.4 percentage points to annualised US GDP growth in the March quarter, and the OECD estimates that 75 per cent of global AI venture capital flowed to US companies in 2025. 

Underpinning all of this is a large, diversified and comparatively self-reliant economy: domestic consumption accounts for roughly 68 per cent of US GDP, and the country has been a net energy exporter since 2019.

Put simply, owning the US market is increasingly a way to own productivity growth itself. Owning the Australian market, by contrast, remains largely a way to own the extraction of commodities and the financing of housing.

A shrinking home market

There is a second divergence at work, and it is taking place on the ASX itself. Australia's listed market is not only concentrated; it is contracting. The number of companies listed on the exchange has fallen by almost 12 per cent over the past five years, and the market is struggling to attract the growth companies that might refill it. 

In October, Firmus, an AI data-centre operator, shelved what would have been one of the largest floats in the exchange's history, pulling a raise of around A$7 billion after lukewarm investor demand. A market led by a shrinking group of banks and miners, and unable to hold on to its most dynamic new listings, becomes a narrower reflection of the economy each year, and narrower still of the parts of the economy that are actually growing. Home bias has always meant accepting less diversification than global markets offer.

In the end, earnings decide

Over the long term, market returns are driven by corporate earnings, and here too the gap is widening. Consensus estimates have S&P 500 earnings growing by around 35 per cent in 2026, and the S&P Small Cap 600 by around 31 per cent. The ASX 200, after two consecutive years of declining earnings, is forecast to grow 12.7 per cent in 2026 and 7.0 per cent in 2027. 

For smaller Australian companies the outlook is weaker again, with cumulative growth of less than 9 per cent expected across 2026 and 2027 combined. What began as a divergence in market composition is increasingly becoming a divergence in earnings, and that is a far more durable force.

A relative call, not an absolute one

None of this is to suggest the US is without risk. In our view, global equities are entering a particularly risk-sensitive period, and the US is by no means immune. Persistent inflation, elevated interest rates and high public debt are challenges shared across most developed economies. What distinguishes the US is its capacity to grow through them. Caution is still warranted. Five consecutive years of US outperformance will tempt some investors to simply extrapolate, and the US market today is neither cheap nor diversified, with a handful of mega-caps carrying the index and pricing in a great deal of future success.

That concentration, though, is largely a large-cap phenomenon. The US small-cap market offers exposure to the same economy across a far broader and more diversified universe of companies: thousands of names, far lighter analyst coverage, and none of the mega-cap premium. For investors wary of the crowd at the top of the index, it is where much of the breadth, and the inefficiency, now sits.

Short-term distractions are rarely in short supply. This week's US midterm elections handed both houses of Congress to the Democrats, and US equities rallied sharply in response. Markets will trade such headlines for a time, but the divergence described here has compounded straight through successive changes of president and Congress. Politics shapes productivity and investment at the margin; it does not determine them.

Investors are already moving

Australian investors are, to a degree, already voting with their money. For years, domestic shares were the largest category in the local ETF market. International equities overtook them some time ago, and the lead is widening: in 2025, international equity ETFs attracted around A$20.5 billion in net inflows, against A$13.2 billion for Australian equity funds, within an industry that grew more than 34 per cent over the year. 

Alongside the rise of investment platforms that put offshore markets within easy reach, the shift suggests a growing number of investors have already concluded that the opportunity set beyond the ASX is too large to ignore.

For Australian investors, the case for looking offshore, and to the US in particular, extends well beyond geographic diversification. In our view, it is about positioning capital in the economy best equipped to translate the next wave of innovation into sustained earnings growth. Home bias was once the cautious choice. 

On the evidence of the past five years, and the structural forces beneath them, it has become a position in its own right, and an increasingly expensive one.