In recent years investors have been head over heels for American stocks as US equities have posted back-to-back 20%+ annual returns. However, questions are growing as to whether this American exceptionalism can be maintained with the Trump administration bringing a greater degree of geopolitical and macroeconomic uncertainty, threats to big tech’s perceived AI dominance appearing and valuations comfortably above the long-term average.
The strong rally in global stocks which began in the back end of 2022 has been underpinned by the stellar performance of US equities, in particular large technology stocks. This has been largely based on the growing belief that artificial intelligence (AI) will provide major productivity breakthroughs, with the release of ChatGPT in November 2022 raising awareness and piquing the interest of the wider population.
Seventh heaven
So far, the big winners have been the companies selling the “picks and shovels” of the AI revolution, such as Nvidia, and other Magnificent Seven firms like Facebook-owner Meta and Microsoft — businesses that have dominant market shares and large amounts of capital to invest in research and development. The standout performance of the largest US stocks has seen levels of concentration rise to their highest on record with the top 10 of the MSCI North America (673 constituents) accounting for over 34% of the index[1].
Global benchmarks have also been significantly skewed by this phenomenon with the US having a 67% weighting in the MSCI All Country World Index. The seven largest stocks in the index are the Magnificent Seven — Apple, Nvidia, Microsoft, Amazon, Meta, Tesla and Alphabet — and account for over 20%. This is not far off double the weighting the index, which consists of 2,647 stocks, gives to Japan, the UK and China combined.
Walking the walk
Although there have been comparisons made to the dot-com bubble from the late 1990s, the situation today is quite different. These large companies are well established, generating substantial revenues and profits whereas many of the hot dot-com stocks were highly speculative start-ups with unproven business models. While higher valuations partly explain the strong performance, US stocks were also supported by rising earnings, driven by revenue growth and margin expansion.
The key area to watch going forward will be tangible signs of delivery from AI, as expectations are very high. Regulation and geopolitics will be in the spotlight with the proposed policies of Donald Trump. Trade tariffs are expected to be less detrimental to software related areas compared to semiconductors, due to the nature of the respective businesses. Tech earnings growth is expected to be strong, running at around 20% compared to 10% for the broader market. We see some potential for a broadening out of returns with the Magnificent Seven predicted to post slightly lower earnings growth (19%) than the rest of the tech sector (21%). The strength of the US Dollar could be a significant headwind to earnings as we negotiate our way through the year, and this will be something to watch as we get to hear Q4 earnings reports.
Struck by Cupid’s arrow
Given the number of US stocks that are best-in-class and have generously rewarded investors in recent years it is perhaps not too surprising that they are favoured by professional money managers. Add in the strong relative outperformance of the US economy compared to European peers and fund managers are feeling increasingly bullish on US equities. 38.9% of respondents to Quilter Investors’ latest Investor Trends Survey[2] (published November 2024) expect the US to be the best performing equity region this year, well ahead of second placed China and Japan (both 16.7%.).
The survey also revealed that despite already receiving a little boost from Donald Trump’s election victory at the beginning of November, fund managers overall saw the positive trend for stock markets continuing. Asked to rate Trump’s potential impact on markets on a scale from +5 for most positive, to -5 for most negative, respondents averaged at +1. The survey represents a good sample of the industry, sent to 21 of the leading fund management institutions representing £22tn of assets.
The one and only?
However, in the months since there has been a cooling of any over exuberance as erratic policy announcements have raised concerns about how positive Trump will be for markets. While US stocks have gained thus far in 2025, they have notably lagged European benchmarks.
The release of a generative Artificial Intelligence (AI) chatbot from Deepseek, a Chinese start-up, sent shockwaves through US technology stocks towards the end of January and sent benchmarks back down to the level they were at on election day. There has since been a stabilisation and recovery (at the time of writing) but the news does represent a possible chink in the armour of what had previously been seen as an almost impenetrable dominant market position.
In summary, while there is a lot to like about US equities at present, investors should be cautious of extrapolating recent returns and thinking that they are the only game in town. We believe deeply in the benefits of portfolio diversification and at present, we see several areas that are offering attractive opportunities, such as Japan and Emerging Markets (EM).
[2] 26808-investor-trends-survey-q4-2024.pdf