The 'Innovation Dynamo' Is Driving Your Portfolio's Performance

Editor's note: This year's volatility will pave the way for long-term opportunities for investors. According to Joel Litman – chief investment strategist at our corporate affiliate Altimetry – one of the biggest drivers of the U.S. economy is still going strong. Find out why betting on future prosperity is still the smart move today...

The U.S. has an ecosystem for innovation that just doesn't exist anywhere else...

This idea, which I'm calling the "innovation dynamo," is a major underpinning of the long-term success of the U.S. stock market.

I've talked about it at the Pentagon and at an FBI conference recently. At Altimetry, it's helping us find great stock picks and understand the balance of global economic power.

And it's supporting the economic dominance of the U.S.

The mainstream media has been oblivious to this, touting a dubious and unsupportable narrative that the country lost its economic dominance years ago. According to this thinking, China's economy is the ascendant power and will soon surpass America's.

The data doesn't support that story. Here are some reasons why...

Like angel investing, venture capital in the U.S. is greater than in the rest of the world combined. It has been that way for more than 40 years.

The same goes for domestic market capitalization. Last year, U.S. companies made up 65% of the total global market value. And based on Uniform Accounting – our preferred method at Altimetry – corporate America's earnings are more than double those of all other companies in the world.

Take a look at the S&P 500 Index over the past 30-plus years. None of the top 20 largest U.S. companies back then hold that same distinction today.

In other words, since 1990, Facebook – now called Meta Platforms (META) – Apple (AAPL), and Amazon (AMZN) have supplanted General Electric (GE), ExxonMobil (XOM), and IBM (IBM)... a testament to our economic vitality.

Chalk that up to our unique emphasis on entrepreneurship...

Nearly half of all domestic mega-cap companies were tiny microcaps only a few decades ago (if they existed at all).

That doesn't happen in the rest of the world. In most other countries, the same monopolistic companies that reign today were reigning decades ago... and will continue to dominate for decades to come.

Take South Korea. Forty years ago, Samsung was the country's largest company. And it hasn't lost its top spot. Today, Samsung's market cap is 215% higher than the No. 2 company, LG Energy Solution.

That's bad. Monopolies just don't innovate the way entrepreneurs do. Of all the research and development invested by U.S. companies, 82% comes from those that were or still are backed by venture capital.

That virtuous cycle unlocks massive shareholder value. It also creates jobs and fulfills customer needs in ever-improving ways.

Entrepreneurs and business leaders succeed, get wealthy, and then turn into investors themselves. Countless universities across the U.S. sponsor startup contests in which students pitch their ideas to real investors. That's unheard of in most other countries.

The innovation dynamo is rooted in U.S. liberties...

And it attracts talent from around the globe to the U.S. economy.

The Constitution and the Bill of Rights ensure due process and the right to private property. In other words, the government can't just walk up and take your stuff.

That's in contrast with many parts of the world, where the government – or a friend of the government's – can legally take your assets and your company, restrict what you do with your money, and limit your speech.

For all of the societal problems in the U.S. today, many entrepreneurs would prefer to start their companies here... where they can also enjoy the fruits of their labor.

That's why legendary investor Warren Buffett likes to say, "Never bet against America." The very foundations that support and encourage our personal freedoms are also necessary for freedom of innovation.

Innovation means good things for the market...

And this information opens up countless opportunities for investors to make outsized returns. In the past year, the market value of U.S. equities surpassed that of the rest of the world's companies combined. Lots of individual stocks reached new highs along the way.

That doesn't mean the market won't have its ups and downs. We as investors will always have to contend with corrections, pullbacks, and bear markets.

But despite near-term volatility, the U.S. stock market has a strong foundation. Current prices reflect only investor fears, not a crippling market weakness.

This year's market conditions are an opportunity in the long term... not a warning. Don't abandon your portfolio.


Joel Litman

Editor's note: Joel says a crisis is taking hold of the U.S. stock market – but it's not what you'd expect. It goes beyond inflation... rising rates... or even a global recession... And it has dramatic implications for anyone betting on a fast, "V-shaped" recovery in U.S. stocks.

Last week, Joel teamed up with Chaikin Analytics founder Marc Chaikin to share the details... and the "financial lifeline" that could help you avoid huge losses (and even make outsized gains) as this shift unfolds.

There's still time to watch their discussion before it goes offline. Get the full story here.

Further Reading

The long-term picture is still in place for U.S. stocks. And while interest-rate hikes will hurt corporate earnings in the short term, not all corners of the market are suffering. Joel shares which groups of stocks to avoid, and which show potential today... Read more here.

"The key for us right now is to focus on companies that don't need the Fed's help to succeed," Marc Gerstein says. Even in a bear market, innovative industries are still marching toward the future. And this ongoing trend points to opportunity in one sector... Learn more here.