Investors love the US, and with good reason. Wall Street has made them rich over the last dozen years. The big question now is whether it can continue to do so.
While China, Europe and emerging markets have struggled since the financial crisis, the US stock market has stood tall and now dominates to an almost unprecedented degree.
In 2008, US shares made up a relatively modest 40 per cent of total stock market capitalisation. Today, they are up to 60 per cent. This is particularly impressive given that the US only makes up 25 per cent of global gross domestic product. Wall Street punches well above its weight. No wonder investors love it.
The result is that many will have far more exposure to the country's fortunes than they realise. If the US stumbles, we're all heading for a fall.
No prizes for guessing why the US has beaten the world. It’s mostly thanks to the Magnificent Seven tech mega-caps – Amazon, Apple, Google-parent Alphabet, Meta Platforms, Microsoft, Nvidia and Tesla.
Today, they make up about 36 per cent of total S&P500 market capitalisation and rising. In the first half of this year, they generated 49 per cent of the S&P 500’s total gains. The remaining 493 stocks on the index just can’t keep up.
Yet many analysts now fear the hype over artificial intelligence could backfire, amid dangerously inflated share values. Warren Buffett’s recent decision to sell half his stake in Apple at the start of August crystallised fears.
In recent days, anxieties have focused on the biggest AI beneficiary of all, chip maker Nvidia. Its shares are up an incredible 2,570 per cent over five years, and 147 per cent so far this year.
Yet its runaway success has made investors jumpy, as we saw when it published its second quarter results on August 29.
Nvidia’s second quarter revenue hit a high of $30 billion, up 15 per cent from the previous quarter and 122 per cent from a year ago. In response, the shares fell 6 per cent.
On September 3, shares of Nvidia tumbled nearly 10 per cent.
The Nvidia board forecasts that third-quarter revenue will climb again to $32.5 billion, but that only marks an 80 per cent increase on last year.
William Marsters, senior sales trader at Saxo UK, said “the market reaction highlights how investors have become too accustomed to exceptional results” from US tech in general and Nvidia in particular.
The slightest wobble from Nvidia is enough to send shock waves through the rest of the market. A US recession could trigger an earthquake.
Thanks to the rise of index-tracking exchange-traded funds, the world has built a significant stake in US fortunes, says Jason Hollands, managing director of fund platform Bestinvest by Evelyn Partners.
An investor holding the Vanguard FTSE All-World UCITS ETF is putting 59.44 per cent of their money in the US. Possibly without realising it.
Second-placed Japan makes up just 6.02 per cent of the trust, with the UK in third place at 3.38 per cent.
That's an incredible level of concentration, and it gets worse.
Apple makes up 4.2 per cent of the entire trust, followed by Microsoft (4.05 per cent), Nvidia (3.62 per cent). Amazon, Meta and Alphabet aren’t far behind. In total, the Magnificent Seven make up more than 17 per cent of the entire ETF.
The world now has outsized exposure to the fortunes of one country and a handful of companies.
“Were the US to hit the buffers, it would have a massive negative damage on the world’s investment portfolios,” Mr Hollands warns.
That's a real worry as the US Federal Reserve battles to avert an economic hard landing, with the first-rate cut now expected in September.
Mr Hollands remains hopeful but warns that even if the US does avoid recession, the country’s equities look expensive today. “If AI doesn't boost profits and productivity as expected, tech could take a beating.”
The US also faces a divisive presidential election in November. The stakes couldn't be higher as Democratic candidate Kamala Harris takes on Republican rival Donald Trump.
Both have policies that could strike fear into markets, Mr Hollands says, with Ms Harris recently mooting price controls, while Mr Trump threatens trade wars.
There is little to suggest that either party will try to rein in the US deficit, even as the country's debt races past $35 trillion, Mr Hollands says. “Big Tech could also take a hit, with calls from both sides to tighten regulatory controls to curb corporate power.”
The US stock market is at a crossroads, with the economy “resilient yet uncertain”, says Tony Hallside, chief executive of Dubai-based brokers STP Partners.
“It remains a pivotal force in global markets, but economic and policy uncertainties could drive a shift to other regions, particularly Europe, with its more attractive valuations.”
Some regions are more exposed to the US than others, notably in GCC countries whose currencies are pegged to the dollar.
“Shifts in US economic policy, interest rate adjustments, or changes in monetary strategy can have an immediate and significant impact,” Mr Hallside says.
Nervous investors might want to rebalance towards more defensive stocks or even increase their cash holdings. “This could provide a cushion and allow investors to capitalise on any downturn by making strategic stock purchases.”
Mr Hallside advises against exiting the market, though. “Investors must be prepared to weather short-term economic cycles,” he says.
Growing numbers will be tempted to seek refuge in gold, which could benefit whoever wins the election, says Marc Pussard, head of risk at APM Capital. “A Democratic win might lead to increased fiscal spending on social programmes and infrastructure. This could raise concerns about inflation, prompting investors to buy gold as a hedge, driving up its price.”
Mr Trump may be good for gold, too. “His previous tenure was marked by political upheaval both domestically and abroad. A repeat would make gold look more attractive as a safe-haven asset,” Mr Pussard says.
Few people will want to dump the US from their portfolios, but it's still worth checking your exposure.
Yet nervous investors have to ask themselves another question. If not the US, then where? Today, no country even comes close to matching its growth potential.
