J.P. Morgan’s US equity investment trusts: Five focus areas for active investors

Investors worldwide have been keen to maintain exposure to US equities, despite being well aware that the strong returns of the S&P 500 index have been largely driven by just the top-weighted companies and technology stocks. The top 10 stocks in the S&P 500 now make up about 40% of its market cap and the technology sector has grown to 30%.

While some of the outperformance of large caps and technology companies has been justified by stronger earnings growth, the managers of two very different US portfolios—JPMorgan American plc (JAM) and JPMorgan US Smaller Companies plc (JUSC)—are looking at opportunities across the market as returns begin to broaden out.

1. Selective technology exposure

J.P. Morgan Asset Management’s US equity research analysts have developed a framework for analysing the impact of artificial intelligence developments on companies across all sectors.

The JAM portfolio managers use this selective approach to focus only on their highest conviction ideas in the technology sector, as part of a concentrated 40-stock portfolio. Technology stocks make up roughly 25%-30% of the portfolio, which is less than the S&P 500, and individual positions are meaningfully different from the index: JAM’s largest technology position is in Microsoft and the portfolio is underweight Apple and Alphabet. Meta, which is trading at an attractive market multiple, is preferred.

US small caps tend to offer more diversification by sector, with technology accounting for just over 10% of the Russell 2000 index. JUSC is finding opportunities in specialised technology companies, such as Qualys, a cybersecurity firm, Workiva, which offers financials reporting software, and Novanta, a technology solution for precision medicine and robotics.

2. Broadening earnings growth and the impact of tariffs

Earnings growth is expected to broaden out beyond technology to other sectors as the US economy powers on and macro headwinds for basic materials, energy and health care fade. The trend could be even more pronounced among US small cap companies. Earning growth for the Russell 2000 was negative in 2022 and 2023 but turned positive in 2024 and is expected to rise roughly 26% in 2025—roughly double the forecast for S&P 500 earnings growth.

Tariffs could pose a risk to earnings across many sectors, but the economic and stock-level impact is difficult to estimate without knowing the full details. Small cap companies tend to have more domestic exposure and may therefore be less impacted by tariffs and supply chain problems. On the other hand, smaller companies that are impacted may face greater challenges negotiating solutions than large companies.

3. Interest rate uncertainty and leverage

Smaller companies tend to have higher levels of debt and more floating-rate debt than larger, more established companies, leaving them more exposed to changes in interest rates. While the Federal Reserve has been steadily reducing interest rates as inflation subsides, a key risk for small cap companies is the potential for tariff-induced inflation to change the path of planned rate cuts.

However, the distribution of leverage across the small cap universe is very uneven—some companies are highly levered and some have no debt—and therein lies the opportunity for active managers. JUSC focuses on higher-quality companies that are profitable and have manageable debt levels.

4. Focus on quality

In the small cap universe, focusing on quality companies helps the JUSC portfolio managers avoid those with too much debt or too few profits and has resulted in a return on equity for the portfolio of 13%, well above the 5% for the benchmark.

In the concentrated JAM portfolio, this focus on quality is critical for taking high-conviction positions that can drive performance at the stock level. A good example is Kinder Morgan, which was the biggest contributor to performance in 2024 at the stock level, despite the headwinds to the energy sector. The company operates the largest pipeline for gas and oil in the US, allowing it to benefit from the volume, like a toll collector, with little risk from commodity price fluctuation.

Opportunities are also being found in the industrials sector. JAM holds Trane Technologies, which can benefit from manufacturing onshoring and ongoing large infrastructure-related projects initially funded by the Inflation Reduction Act that could continue. JUSC has positions in Hawyard Holding, a pool equipment company, and Toro, which provides lawn irrigation and agriculture equipment.

Both portfolios have strong exposure to financials. JAM holds a variety of companies including Capital One, Berkshire Hathaway and M&T Bank, while JUSC has positions in Kinsale Capital Group, a specialty insurance company, and Moelis, an investment bank.

5. Relative valuation opportunities

The S&P 500 is trading around the high end of its historical forward price-to-earnings (P/E) range, but a closer look reveals that the while the top 10 stocks are trading at around 30x earnings, the average P/E for the remaining 490 stocks is around 20x.

Small cap stocks look even more attractive on forward earnings. While the Russell 2000 index currently trades in line with its historical average forward P/E, its relative valuation vs. large caps is below the long-term average premium. Active managers in US equities have the potential to focus on many relative valuation opportunities across all sectors and market caps.

Conclusion: Take an active approach to US equity

US equities will remain an essential part of portfolios, given the size, breadth and growth potential of the US stock market. With active stock selection becoming even more important as the macro landscape evolves, J.P. Morgan’s two US equity investment trusts—JPMorgan American plc and JPMorgan US Smaller Companies plc—are positioned to capitalise on opportunities across the US market, backed by active stock-level research.