Before considering the headlines and any Trump-induced effect on US equities, it is important to first consider where we are and how US Equities got here. It presents itself as a largely “goldilocks” storybook.
S&P 500 earnings and forward earnings are strong and the Mag 7* are leading this growth.
Again, the Mag 7 are operating at +20% net profit margins compared with the rest of the market, however these companies have maintained a respectable 12% margin.
The index is elevated, especially with concentration of performance in the Mag 7 and the S&P 493 (ex Mag 7) at over 20 times. Looking overseas, the valuation gap between the US and other developed markets is at 20 year highs. Valuations imply (and require) high earnings growth to justify these levels. At a market level, there is strong element of pricing for perfection.
Despite some January bond market volatility and DeepSeek Shock, US Equity Market Optimism is riding high (which of itself is reason for some pause and cautiousness).
The disparity between the US economy and the rest of world (ROW) can be best seen through the lens of productivity growth. The US started moving ahead after the GFC (having truly reset and expelled their economic demons) and this took another leg up post-COVID. Both episodes, whilst different in nature and impacts, were taken as opportunities for US business and household resets – the US economy doesn’t waste a good crisis.
The US economy is in good health across households and firms (but we note some lax credit in non-investment grade lending to business). Job creation is healthy and the unemployment rate is 4.0%. Underlying inflation has moderated to between 2.8% and 3.2% p.a. depending on your measure. Real GDP growth was 2.3% annualised for the 4th quarter 2024, compared to 3.2% 12 months prior.
Whilst the Fed Cash Rate has moderated to 4.5% p.a. from its high of 5.5% p.a., the economy appears equipped to absorb this adequately, whilst still maintaining a falling inflation trajectory.
US Presidents are famous for their first 100 days and creating a momentum that will take them through the mid-term elections (in 2 years time) and then onto seeking a second term re-election. The Trump presidency is vastly different, because whilst a new president, there is no next term, having already served a term between 2016-2020. In legacy building terms, time is therefore of the essence, and this president is wasting no time. This begs the obvious. If the US economy is in such good shape, what are the implications of Trump’s economic policy on US equity markets? We think looking past the headlines and carefully examining, it is quite positive. That said, we do have significant reservations on the current level of equity market valuation, which to be fair, was present before Trump was elected. Trump’s policies as we now see them being implemented can grow the US economy and deliver significant wealth effect benefits. Our major reservation is the extent of economic policy change and business and households ability to absorb this generational change. (note – our analysis is only focused on the economic benefit, cost and flow-on effects to US equities)
Our in-house Research & Analysis Division applies our over 30 years experience to investment analysis and equity strategy construction, in turn delivering the best opportunities into our Australian and Global Equity portfolios. We are benchmark agnostic and advocates of the significant risk management benefits of equally weighting. Each company investment is scrutinised against our rigorous 10-factors assessment, designed to yield superior risk-adjusted returns.
To obtain further information on the Cameron Harrison Global Equity Strategy, please contact us here.
Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.
For more information on our approach to investment strategy, please contact us on +613 9655 5000 or contact our experts here.