Investment Outlook: Exceptional US equities

The US stock market has been exceptional over the past decade by consistently outperforming its global peers. The strength and vibrancy of the US economy, along with innovation in the tech sector, has driven company earnings and market performance higher during this time.

However, this comes at a price. Equity valuations are more demanding, and the market is increasingly concentrated, creating risks. Even so, we believe US exceptionalism is likely to continue under the incoming Trump administration, as taxes are kept low and bureaucratic red tape is cut back.

Trump bump for US stocks? 

Although it is still early days, equities have had a mixed performance since the US presidential election on 5 November. US stock returns have risen compared global equities (ex US) in sterling terms. This divergence can broadly be explained by investors’ anticipation of tax cuts and deregulation from the incoming Trump administration, as well as ongoing solid US economic fundamentals.

In contrast, UK Chancellor Rachel Reeves’ tax raising budget did little to boost the domestic stock market.

Elsewhere, European stocks appear in the crosshairs of potential US tariff hikes under president-elect Trump, while the collapse of the German governing coalition has not helped either. Investors can expect political uncertainty in the largest European economy until elections are held on 23 February 2024.

Drivers of US equity exceptionalism

Now the dust has settled following the US election, investors’ focus will gravitate back to the dynamism of the US economy and the ability of its listed companies to deliver on earnings. This is where US equity exceptionalism kicks in.

First, the US economy has a consistent track record of growing faster than other major economies, providing domestic firms with the capacity to expand their revenue growth. Much of this economic outperformance boils down to relatively favourable demographics and stronger labour productivity growth. For instance, US labour productivity has averaged a 1.6% annual growth rate over the past two decades, compared to 0.6% for the UK and 0.5% for Germany.¹

Second, the US excels in innovation. A relatively low tax regime, combined with buoyant research and development expenditure has helped nurture some of the most valuable and highly profitable technology companies in the world. US tech companies have helped lift the overall equity market profit margin to more than 12%, above the UK and Europe ex-UK at 10.7% and 9.6%, respectively.²

Third, the US government continues to run a large budget deficit, as it is spending more than it raises in taxes. This loose fiscal approach ensures that the private sector can sustain spending. During Covid, when the government directly supported households, it also alleviated the need for companies to pay higher wages which would have reduced profit margins. If President Donald Trump cuts personal taxes in 2025 it could have a similar impact.

Collectively, these factors have contributed to relatively solid company earnings. Since the Global Financial Crisis of 2008, US listed companies have, on average, grown their reported trailing earnings per share (EPS) by around 6% per year more than non-US peers.³ This has driven outperformance of the US stock market relative to global peers as shown in the chart.

Looking towards 2025, faster relative US real gross domestic product (GDP) growth is likely to continue. The latest Bloomberg survey of economists shows 1.9% real GDP growth in the US, versus 1.5% for the UK and 1.2% for both the EU and Japan.⁴ While many companies generate their earnings from across the world, the US economy can continue to support EPS growth in its equity market.

Aside from earnings, US firms have also demonstrated a shareholder-friendly focus. US companies continue to return relatively more cash back to investors through share buybacks. Our Head of Quantitative Research, Krishna Nehra, has calculated that the average US net buyback yield (share buybacks over market capitalisation) over the last 10 years was 1.9%, versus 1.0% for the UK and 0.6% for Europe ex UK.⁵

The bottom line here is that US companies have an inbuilt ‘X’ factor from solid and sustainable earnings growth, as well as a shareholder friendly culture, to drive total equity returns.

Risky business

There are, however, risks associated with US equity exceptionalism First, US equities trade at a record high 65% price-to-earnings premium to global equities (excluding the US).⁶ The risk here is that the current valuation of the market is too expensive and prices adjust to a lower level.

Second, the US faces acute market concentration risk. Artificial Intelligence (AI)-related stocks like Nvidia account for a sizeable share of stock market performance. Together, the Magnificent Seven stocks* account for a near record 33% of the benchmark S&P 500 market cap.⁷ Should the AI theme fail to deliver against investors’ expectations, there is a risk that tech stocks could weigh on overall US equity performance.

And third, US government debt continues to accumulate at an alarming rate. Given Trump’s tax cutting agenda, US Treasury debt could rise even faster under his administration. For now, the US has relied on deep and liquid bond markets and its reserve currency status. This helps it to attract investment capital to avert a sharp uptick in Treasury yields. However, at some point in the future, fixed income investors may demand higher yields to compensate for the increasing financing risk that that comes with lending to the US government.

Follow US tax cuts and deregulation

There was a clear winner when Trump beat Kamala Harris in the November presidential election. Not only did Trump win the popular vote and all seven so called battleground states, but he also increased his share of the vote in 49 out of the 50 states compared to 2020.⁸ The uncertainty of a disputed outcome in what has been a highly polarised election was avoided.

Trump has a strong mandate to deliver on his largely, equity market friendly campaign promises. That’s because the Republicans achieved a “clean sweep” by winning control of the White House and both the Senate and House of Representatives. This increases the probability that much of his campaign rhetoric could become legislation.

On the fiscal front, Trump intends to keep taxes down for corporations and individuals – see our October Investment Outlook, Reading the rhetoric ahead of the US election. However, Trump has made plenty of noise about broad-based trade tariff hikes, including applying them to Canada, China and Mexico (the main trading partners with the US) on his first day in office on 20 January. This could be used to fund individual income tax cuts, which are due to expire at the end of 2025. Making them permanent will be a priority.

Trade tariff hikes may not be that drastic if they are used to incentivise other countries to invest in US-based manufacturing, rather than raising prices for consumers. Trump will be acutely aware of the damage higher inflation did to the Democrats in the last election. He will want his ‘America First’ agenda to facilitate the election of another Republican president in 2028.

Besides fiscal measures, Trump is set to push forward on deregulation and can count on a conservative leaning Supreme Court that has reduced the power of the federal government to regulate certain industries to support him.

Trump has signalled plans to cut federal bureaucratic red tape through the creation of the Department of Government Efficiency, which is to be co-headed by the SpaceX boss, Elon Musk, and tech investor, Vivek Ramaswamy. While there is no budget or formal mandate for this new project, Trump hopes to use the expertise of entrepreneurs to squeeze out efficiencies in the federal government to free up more capital for the private sector. Trump has set the duo a deadline to complete their work by the 4 July 2026 — the 250th anniversary of the signing of the Declaration of Independence.

Musk has a record in demonstrating efficiency gains in the private sector. For example, a research report from 2022, covering 203 space missions, found that privately run SpaceX was ten times cheaper and twice as fast as state-run NASA.⁹ Of course, streamlining the federal government is a different proposition to running a private company, like SpaceX.

Will the US continue to outperform peers? 

US equities have rallied since Trump secured a Republican clean sweep with promises of tax cuts and deregulation. The clear mandate given to the US Republican party by the electorate should help the US to maintain its equity exceptionalism at the expense of the rest of the world.

In contrast, governments in countries that are raising taxes, like the UK, are creating headwinds to attracting investment. There are good reasons to believe that the US can use its ‘X’ factor to outperform for some time yet.

Sources and footnotes

1,2,3,6,7 LSEG, Evelyn Partners
4,5 Bloomberg
8 The common national experience that explains Trump’s 2024 gains, CNN, 12 November 2024
9 How to Solve Big Problems: Bespoke Versus Platform Strategies, Oxford Review of Economic Policy, Atif Ansar and Bent Flyvbjerg, 2022

* Tesla, Apple, Amazon, Alphabet (the parent of Google), Nvidia, Meta and Microsoft