The US equity rally so far shows no signs of slowing down, and in the wake of the US election results the S&P 500 has been sent to new highs. Despite valuations nearing record territory, many investors are still confident market outperformance could continue into the new year. So where do the opportunities lie for those still keen to tap into the world’s biggest economy?
The rally rolls on
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 6 December 2024, the S&P 500 Index is up almost 28% year to date1 , after breaking through 6000 points in mid-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 alone, large-cap US equities took in more than $217 million inflows from Australian iShares investors – almost double their average monthly inflows from January to October 20242.
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 million3. Large-cap US equities remains iShares’ most popular Australian product category in 2024, attracting more than $1.67 billion in flows year to date4.
How much upside may be left?
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 crisis5.
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 20256. With 2025 earnings growth for the S&P 500 currently projected at around 14%7 , 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.
Source: LSEG Datastream, BlackRock Investment Institute, 3 December 2024.
Notes: 12 month forward profit margin as calculated by 12-month forward total earnings divided by sales. US represented by MSCI USA Index. Europe represented by MSCI Europe Index. Projections and forward looking statements may not come to pass.
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.
Different ways to play the Trump trade
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 growth8, with top holdings including Microsoft, Apple and NVIDIA9 .
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. As an example, some of the largest non-tech stock weightings in the index include Warren Buffett’s insurance giant Berkshire Hathaway, and global wholesale retailer Costco.
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.
Source: BlackRock based on holdings data for iShares S&P 500 ETF, iShares S&P Small Cap ETF and iShares S&P Mid Cap ETF as of 19 November 2024
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.
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REFERENCES
1. Source: BlackRock data as at 6 December 2024. Past performance is not a reliable indicator of future performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
2. Source: BlackRock data as of 15 November 2024
3. Source: BlackRock data as of 15 November 2024
4. Source: BlackRock data as of 30 November 2024
5. Source: BlackRock Investment Institute and LSEG Datastream, November 2024.
6. Source: BlackRock Investment Institute as of 15 November 2024, based on a survey of approximately 100 2025 BII Outlook Forum attendees. Projections and forward-looking statements may not come to pass.
7. Source: BlackRock data as of 18 November 2024. Projections and forward-looking statements may not come to pass.
8. Source: S&P Dow Jones as at 19 July 2024, based on average annualised returns over a 10-year period. Past performance is not a reliable indicator of future performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
9. Source: BlackRock based on top 3 holdings of iShares S&P 500 ETF as at 9 December 2024. For illustrative purposes only. This is not a recommendation to invest in any particular financial product.
Note examples used are the largest financials and consumer staples sector holdings in the iShares S&P 500 ETF. For illustrative purposes only. This is not a recommendation to invest in any particular financial product.
Opinions are subject to change and they are not a guarantee of future results. This information should not be relied upon as research, investment advice or a recommendation.
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