Why we’re living in exceptional times for US equities

The outsized growth of the Megacap 7 tech stocks, combined with the commencement of interest rate cuts and now a clear election outcome, have helped to push the US equity market from strength to strength in 2024. As of 15 November 2024, the S&P 500 Index is up more than 23% year to date², after breaking through 6000 points – its latest all-time high – on 11 November.

While market sentiment had turned more balanced in Q3 following August’s sharp downturn and in the lead-up to the election, former President Trump’s victory has seemingly provided the signal for investors to re-enter US equities. In the first two weeks of November, large-cap US equities have seen more than $217 million inflows from Australian iShares investors – almost double their average monthly inflows from January to October 2024.³

Source: BlackRock data as of 15 November 2024. Flows are in Australian dollars.

Including US mid and small-cap exposures to the mix, total flows to iShares US equities ETFs in the first 14 days of November were more than $240 million.⁴ Large-cap US equities remains iShares’ most popular Australian product category in 2024, attracting more than $1.16 billion in flows year to date.⁵

By historic measures, it’s not surprising some investors may be questioning whether US shares could run out of puff. Looking at the cyclically adjusted price-to-earnings ratio of the index over the last century, we see that the S&P 500 has only reached these levels a handful of times before – prior to the 1929 crash, the 2000 dot-com bust and during the extreme volatility of the COVID crisis.⁶

A recent survey of BlackRock global investment professionals reveals more than 60% believe the US is the best market to generate above-benchmark returns in 2025.⁷ With 2025 earnings growth for the S&P 500 currently projected at around 14%⁸, rate cuts still on the horizon from the Federal Reserve, and economic growth looking robust, macro and business conditions are still supportive of further gains.

US represented by MSCI USA Index. Europe represented by MSCI Europe Index.

While it also raises risks around persistent inflation, the potential policy agenda of a second Trump presidency is likely to be firmly ‘America first’, including support for domestically focused industries and a tougher trade stance on China – which could contribute to relative outperformance for the equity market. We also see the AI theme continuing to play out in the US long-term, meaning cyclical patterns in stock valuations become less relevant – for instance, megacap tech names may not return to their previous weightings within US equity benchmarks.

So, which sectors can benefit from these supportive trends? We expect continuing strong earnings from big tech names and are comfortable leaning into the current concentrated AI scenario, which has generated outsized returns for portfolios this year. However, we also see gains broadening out to more cyclical and domestic-focused industries in the US, as a result of the political climate and falling rate environment.

With an over 30% weighting to technology and a long-term track record of over 10% annual returns, the S&P 500 Index remains a simple and powerful option for investors to access the innovative companies driving equity market growth⁹. As the best regarded gauge of US equity market performance, covering around 80% of market capitalisation, investors can also tap into diversified growth from winners beyond tech through the index, capturing the potential market upside of the broader ‘America first’ theme.

For investors wishing to lean further into market performance beyond tech, where valuations are less stretched and macro tailwinds could prove beneficial, mid and small-cap indices offer more concentrated exposure to sectors such as industrials and financials. These sectors have outperformed as part of the ‘rotation trade’ away from megacap names in the second half of 2024, and financials in particular are likely to benefit from a potential Trump policy agenda.

Depending on their preferences or views, investors could consider a core allocation to large-cap US equities, while potentially building on tactical ‘tilts’ to small and mid-cap exposures with higher weightings to cyclical sectors. Broadly, with deregulation and corporate tax cuts potentially on the agenda, and the AI theme continuing to expand, we think the US has the potential to outperform well into the new year.