Katherine Magee, US equity investment specialist, discusses the ongoing uncertainty in US equity markets and why now is a great time to take an active approach.
There is no escaping the fact that this has not been an easy year for US markets. Under President Trump’s confrontational regime, they have been beset by waves of macroeconomic uncertainty regarding international trade, immigration and prospects for growth, as well as concerns around tech-specific risks.
Yet at the start of the year, many investors expected another impressive year for the US, on the back of Trump’s campaign to Make American Great Again.
In our own new year outlook, we anticipated further strong economic growth, positive consumer sentiment - a key factor, given that consumer spending accounts for 70% of US GDP growth – and continuing robust earnings at a company level, albeit across a wider range of sectors than during the technology-led boom of the previous two years.
In reality, however, the implementation and revision of Trump’s tariff-led trade policy has undermined sentiment towards the US both domestically and internationally.
The upshot is that after two years over which it gained more than 50% in value, the S&P 500 Index of large-cap companies has fallen by almost 6% year to date¹.
This pullback has also accelerated a shift already under way in US market leadership, says Katherine Magee, a US equity investment specialist.
“At a company level, we saw strong earnings growth averaging around 15% year on year from the S&P in the fourth quarter of 2024²,” she notes. “Importantly, though, it was being generated by a broader range of companies, after two years in which the so-called Magnificent Seven tech giants dominated performance.”
Since the start of the year, that rotation has continued, out of growth-focused businesses, especially tech, and towards value-oriented companies typically found in sectors such as utilities, energy, industrials and consumer staples.
Does this leave investors wondering whether perhaps American markets have had their moment in the sun?
Time to be active
Now is undoubtedly a time to make use of disciplined stock-pickers, Magee argues. “We’re still relatively positive on the growth potential of the US market, but it’s now very important to be active in stock selection,” she stresses.
JPMorgan American Investment Trust (JAM) merits special attention in this respect. It’s run as a bottom-up, concentrated portfolio of around 40 mainly large-cap stocks, though the portfolio managers have the freedom to hunt further down the market capitalisation spectrum if they wish.
Importantly, it comprises both growth and value-focused best ideas, with the two parts of the portfolio being run separately by specialist teams – and that means, as Magee puts it, that the managers “can continue to invest successfully regardless of which style is in favour”.
The two investment teams not only hunt in different parts of the market, but also bring contrasting perspectives on stock selection. “We think that’s a further strike for us,” she adds.
Thus, while both teams look for high-quality businesses with strong management teams, there are significant differences in the key business characteristics they seek.
The growth team looks for growth enterprises that are under-appreciated by the stock market, with sustainable competitive advantages and extensive or growing demand for their products.
The value team, meanwhile, invests in companies with strong cash flows, a high and sustainable return on capital invested and attractive valuations.
For the portfolio as a whole, this differentiated approach results in a broad church of the best businesses from most sectors of the market.
Technology, healthcare and communications companies comprise the majority of the growth-focused portion, while financials, real estate, utilities and consumer staples account for a significant chunk of durable, dividend-paying value-oriented investment.
But although JAM encompasses the diversity of the US market, it is not constrained by the benchmark. For example, says Magee, the tech allocation accounts for 24% of the total JAM portfolio; but this is 5% underweight relative to the S&P 500³. The managers trimmed the positions last year as valuations soared, reinvesting the profits into “interesting areas beyond the tech space”.
This approach has rewarded long-term investors, with share price returns ahead of the benchmark S&P 500 over five and 10 years⁴, and far ahead of its AIC peers in the North America sector over 10 years⁵.
Looking ahead, there is undoubtedly heightened uncertainty around many aspects of the direction of travel for the US economy at the moment, and that’s likely to impact the market at times. But as Magee emphasises, “volatility is normal”. Indeed, it’s an integral part of equity markets.
She points to analysis of the S&P 500 showing that over the past 45 years, almost every year has seen intra-year periods of significant market downturns, with falls averaging around 14% over the period as a whole⁶. Yet annual returns were positive in 34 of the 45 years, underscoring the importance of a long-term perspective to equity investment.
Ultimately, she says, periods of market volatility are best ridden out through robust active management - and JAM’s equal emphasis on high quality growth and value stocks makes it a strong and steady contender for 2025.
