The US continues to be a popular choice for investors in spite of the volatility since the start of the year. The Investment Association (IA) North America sector drew in £570m in assets over the first quarter alone1, making it the second most popular sector. Much of this investment in US equities is flowing into a handful of dominant companies, creating risks for investors. However, at the same time, it is opening investment opportunities elsewhere for investors willing to delve deeper into US markets.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
The concentration in the US market is acute, with a handful of technology companies dominating returns. This collection of companies Amazon, Meta, Alphabet, Tesla, Nvidia, Apple and Microsoft2 is seen as being in prime position to benefit from the growth of artificial intelligence. These companies account for over 30% of the market capitalisation of the S&P 5003.
This has left valuations looking stretched. While some of the Magnificent Seven are still delivering impressive earnings growth4, it is by no means universal. Where companies have disappointed the market’s high expectations, share prices have been hit hard5. There may be risks inherent in excessive concentration in just a handful of companies when investing in North America.
Has investing in the USA changed since the election?
It is also worth noting that the environment has changed significantly since the start of 2025. The new administration has changed course on economic policy, and the outcome of its tariff policy is still highly uncertain. This has meant the outlook for inflation is less clear and interest rates are likely to come down more slowly.
This is a different backdrop for markets and one that, in our view, is likely to value a different type of company. We believe predictable and consistent growth, compelling valuations and a growing dividend may become a greater priority for investors.
This does not mean sacrificing growth when investing in the USA. BlackRock American Income Trust Plc (BRAI) has significant holdings in sectors such as healthcare, which is supported by new innovation. The new range of weight loss drugs is an important example. GLP1 drugs6 are an important breakthrough.7 There are also developments in areas such as oncology and Alzheimer’s8, 9. The market has chosen to focus on the growth potential of AI, but that doesn’t mean there isn’t growth to be found elsewhere.
Lower valuations are making investing in the USA more attractive
The narrow focus has left valuations in the broader US market looking more attractive. In the rush to participate in the AI boom, many interesting and resilient companies have been overlooked. Earnings growth is likely to be more evenly distributed. It is good investment practice to diversify your portfolio across a range of sector, ensuring that you are not over-exposed to an one particular theme. We believe this is particularly important today when investing for both growth and income in US markets.
Diversification and asset allocation may not fully protect you from market risk.
There are early signs that market leadership is already starting to broaden out to more defensive sectors.10 As part of this, the market may start to value other characteristics.
As the US economy continues its recent run of strength, we believe this may signal the future for the US market and investors should be prepared.
1 The IA – fund statistics - March 2024
2 CNN – The Magnificent Seven Explained - May 2024
3 Investors’ business daily – 2 'Dynamic Duo' Stocks Drive 57% Of The S&P 500's Gain This Year - January 2024
4 CNBC – Nvidia Earnings Report - May 2024
5 Yahoo Finance – Tesla Stock Tumbles - May 2022
6 CNBC – Fed holds rates steady, indicates three cuts coming in 2024 - December 2023
7 Reuters – US consumer inflation resumes downward trend as domestic demand cools - May 2024
8 MayoClinic – GLP-1 agonists: Diabetes drugs and weight loss
9 BlackRock, April 2024
