We’re approaching a pivotal moment for investors in the US. The S&P 500’s impressive rally (up 21% year to October 24) has until recently been dominated by a small number of stocks in the Magnificent Seven. Now, however, the market is broadening out to the small and mid-cap sectors, with the equal-weight S&P 500 index hitting a record high last week.

For investors, the market shift is creating long-term opportunities. While the US presidential election may spark some market jitters, due to uncertainty regarding the winner’s domestic political priorities and their stance on various geopolitical situations, the economy appears to be on a sound footing and should be supported as we enter a cycle of interest rate cuts. 

In the JPMorgan American Investment Trust (JAM), our approach to stock picking remains unchanged, irrespective of the pending election or its outcome. We will continue to focus on high-conviction stocks and invest in quality businesses with good management teams and strong balance sheets. We are currently finding attractive opportunities in the consumer discretionary and healthcare sectors. While worries about the health of the consumer have caused some volatility in the space, we were able to take advantage by adding McDonald’s to the portfolio. We believe the fast food chain is well positioned in the current environment as it has an iconic brand and a very defensive model.

For those investors looking to diversify their US equity exposure, US smaller companies provide an attractive alternative, offering a chance to invest in the heart of America. Small-cap stocks are diverse and more domestically focused than the multinational giants at the top of the S&P 500.

The JPMorgan US Smaller Companies Investment Trust (JUSC) focuses on stocks with quality businesses and quality management that are trading at attractive valuations. Companies such as MSA Safety are good examples of how to tap into this market. As global leaders in the development, manufacturing and supply of safety products, MSA provides mission-critical and non-discretionary safety products. MSA tends, as a result, to experience less cyclicality compared to many other industrial companies, with regular replacement of safety equipment often mandated by law. The company is profitable and requires limited capital investment, driving strong and durable cash flows.

Similarly, JUSC has built a position in Encompass Health, the largest operator of inpatient rehabilitation facilities in the US, which provides services that are largely needs-based. Patient volumes are non-cyclical and benefit from an ageing population. The combination of steady revenue growth, attractive profit margins, and strong cash flows testifies to the quality of the business.

One risk to the outlook for US stocks is the labour market, which we expect will continue to slow. While the overall employment market is still experiencing excess job openings, in some key sectors – including construction and retail – job openings are now below their five-year averages. If this trend broadens out, it may create a headwind for consumer spending growth over the remainder of this year and beyond.

However, at the moment, the economic environment remains supportive for US equities. With economic growth solid, unemployment low, most of the journey back to 2% inflation completed, and rate cuts underway, the US economy should continue to provide a rising tide to support most investment boats for the rest of this year and into 2025.