‘Play it again ‘Uncle’ Sam’

US Exceptionalism: Can the Outperformance Continue?

Even with the slightly pessimistic outlook for 2024, the US stock market had an exceptional year, with the S&P500 delivering one of its strongest performances in history, though much of this was led by a small handful of stocks.

As we look to 2025, several factors suggest US markets could remain a standout:

With the Republican Party securing a clean sweep in the 2024 elections, President Trump is expected to have more freedom to implement his policies in his second term. Here’s what investors should consider:

• Focus on Stock Market Performance: Trump views stock market performance as a key indicator of his success, aligning his administration’s priorities with investor interests.
• Trade and Tariffs: ‘America first’ tariff policies aimed at encouraging manufacturing in the US could have a mixed impact—potentially limiting inflationary pressures but altering global supply chains.

• Tax Cuts and Deregulation: Further tax cuts and red tape reductions are likely. While tax policy changes may take time to impact the economy, they could provide immediate support to stock markets.
• Immigration: A crackdown on illegal immigration could weigh on certain sectors like agriculture, but a scaled-back approach may reduce the economic disruption.
• Geopolitical Stability: Trump’s administration is expected to focus on negotiations over conflict, which may support global market stability.While there are risks—such as high valuations in sectors like Artificial Intelligence (AI), the US markets remain supported by strong fundamentals, making increased exposure to this market a prudent strategy.

Bonds are regaining their appeal:

• Attractive Yields: UK gilts are offering a 5.5% yield, equivalent to a real return of nearly 3%, presenting an appealing alternative to equities, especially in Europe.

• Diverse Opportunities: Investors are also finding value in international bonds, including those from Portugal, Romania, and Germany.

• Volatility Awareness: Bonds have become as volatile as equities, underscoring the need for a well-diversified portfolio.

The AI revolution is driving innovation and creating new opportunities across industries. It is important to consider those companies who will be enabled by AI and who will earn from “enabling the enabled” as well as those companies supporting the infrastructure of AI.

Key investment areas include:

• Data Ownership and Infrastructure: Companies like RELX (legal and medical data) and Equinix (data centres) are poised to benefit from the AI boom.

• Efficiency Gains: Firms such as Rentokil and Waste Management are leveraging AI to optimise operations and drive growth.

• Cloud Infrastructure: AI can’t happen without the Cloud.

Understanding and managing risk is critical to achieving long-term financial success. I will be writing a newsletter in the coming months focussing solely on ‘risk,’ but for now here are key considerations:

1. Inflation remains sticky:  The risk of doing nothing could erode your cash’s value over time.

2. Volatility: Short-term market fluctuations are normal but tend to even out over time, emphasising the importance of staying invested.

3. Longevity: For couples, there’s a 50% chance one partner will live to age 90—making a long-term income strategy essential.

4. Sequencing Risk: Timing withdrawals during retirement requires careful planning to avoid depleting your assets prematurely.

With markets adapting to new norms, a balanced and diversified approach remains crucial:

• US Market Focus: While US equities remain a core component, avoiding over-concentration in sectors like AI is vital. Just 7 companies make up 33% of the S&P 500 index and contributed 55% of all the returns of the S&P500 in 2024 – the largest concentration in history.

• Employ Active Managers: Passive investors have had a great run, especially if invested in US equities but as we have already seen this month the AI Titans have sold off on one piece of news from China. Active managers will control these concentration risks.

• Global Bonds: High yields make bonds an attractive addition to portfolios, particularly for those seeking income and stability.

• Alternative Investments: Assets like gold can provide a hedge against geopolitical risks and inflation.