When will the US market start to wane?

With the inauguration of Donald Trump as the 47th president of America comes a chance for clarity and answers to the issues investors have chewed over for months. Trump began his tenure by signing a raft of executive orders and repeating threats of taxes and tariffs on foreign countries, but the likelihood of the returning president delivering on his pledges is still open to question. 

If he turns all of his election manifesto into reality, the ensuing duties, deregulation, hefty tax cuts, unfettered carbon emissions, immigration curbs and deportations have the potential to drive US share valuations higher, usher in a new wave of inflation, put the kibosh on the country’s green energy sector, halt US interest rate cuts, and create economic disruption for trading partners and ultimately the US itself. 

What investors have had to puzzle over is the feasibility of implementing these protectionist policies, alongside their different and sometimes contradictory impacts on a range of sectors and asset classes. Will the large fiscal stimulus from tax cuts and looser regulation outweigh the drag from a new wave of inflation and curbs on supplies of labour? There are other questions too: how will tax cuts be funded? How will the bond markets react? 

But as the world waits to see the consequences of Trump’s second term in office, many analysts are certain about one thing: that the US stock market will dominate the global stage again this year. Reasons for this bullishness include the supportive tailwinds of Trump tax cuts and deregulation. Consumer spending is purring along, and although tariffs have the potential to increase prices for consumers and Federal Reserve rate cuts are potentially off the table, the fact is that higher rates have failed to cool the US economy. Goldman Sachs forecasts growth of 2.4 per cent this year, Schroders says 2.5 per cent.

Capital Economics thinks that strong earnings growth (and not just from the main tech sectors), AI enthusiasm and US exceptionalism will help to drive up the S&P 500 to the 7,000 level (from around 6,000 now) by the end of the year. Goldman sees the US bull market continuing thanks to demand for AI and because companies themselves are a powerful source of demand for equities with buybacks at a record high in 2024. “All said and done,” the bank’s Mike Washington concludes, “we’re looking at another double-digit-return year”. 

The view at Franklin Templeton is that the application of AI across multiple sectors, as well as re-industrialisation as manufacturers move back onshore, heralds the start of a new business cycle that will coincide with an era of deregulation. BlackRock sees the US continuing to stand out thanks in part to its ability to capitalise on mega forces. 

But there are risks. Rising bond yields could trigger steep falls in equity valuations, and given the highly concentrated nature of the S&P, where more than a third of the value belongs to just seven companies, a loss of confidence from falling AI demand or concern over the capex required could be extremely damaging. 

Capital Economics takes the view that the S&P 500 ascent has been fuelled by earnings which are fundamental in nature, rather than a pure bubble where there is little to support investors’ faith. But it envisages a substantial correction in the index only in 2026 once its price/earnings ratio “has reached the sort of level [greater than 25] at which it peaked before the dotcom bubble burst”. Schroders notes that small and mid caps can provide a less costly way to gain exposure to the world’s largest economy.

Whatever the risks, the US is always worthy of investors’ attention given its rich array of exceptional companies. It is for that reason, and because it reflects the reality of modern investing, that several US companies will now be included in our Results & Trading Update page. Our coverage of UK companies remains unchanged and there will be no reduction in the number of London-listed companies we report on.

In addition, our US-based reporter Arthur Sants will be exploring opportunities in the US market – such as his analysis of the real winners in the battle for self-driving vehicles. Do let me know your thoughts via email.

In a further sign of the changing times, those of you who hold investment trusts will be acutely aware of the battle to gain control of seven trusts by activist Saba Capital. Saba has lost its first vote, but I recommend listening to Dave Baxter and Dan Jones’ grilling of Saba founder Boaz Weinstein.