An underappreciated investing concept is that markets dont trade on good versus bad, but rather on better versus worse. Many bear markets end when economic data remains poor but turns less bad. Bull markets can end when markets are priced for perfection and data comes in less good.

This came to mind as we considered recent data from the Citigroup Economic Surprise Indices (adjacent). Although the U.S. economy has outperformed the European economy in an absolute sense, recent European data has come in ahead of low expectations, while U.S. data has come in below high expectations. This helps to explain the reversal in leadership this year, with overseas stocks outperforming.

It is too early to say if the leadership reversal will continue. However, investors focusing on sluggish overseas economic results should consider the low bar that low expectations create for good market outcomes.