Will the US bull market continue?

James Yardley 27/06/2023 in Equities, US

It’s been an interesting year in the US so far. There have been three sizable regional bank failures, negotiations over the debt ceiling extended to the 11th hour, economic data has been mixed, and inflation – although now falling – is still well above the central bank’s target.

But despite all the bad news, the S&P 500 Index is in bull market territory – at least it is in US dollar terms. Since its low on 12 October 2022, the index is up 21.6%*, while the NASDAQ is up a huge 40.4%*. In sterling terms, however, the rise is less impressive at 5.9%** and 21.9%** respectively.

Some US equity funds have posted strong returns – even in sterling. Baillie Gifford American and AXA Framlington American Growth, for example, are both top quartile in their sector, returning 13.9%** and 10.5%** respectively.

So what’s behind the rise?

According to Eric Gordon, head of equities at Brown Advisory, the “Sensational Seven” (Apple, Microsoft, Amazon, Google, Nvidia, Meta and Tesla) have combined to account for the entirety of the market’s positive return year-to-date.

“The combination of investor fear surrounding the uncertainty of the early March regional bank crisis and the late May debt ceiling negotiations, combined with Nvidia’s impressive evidence of highly accelerated investment in generative AI, created an ocean-wide gap in performance among the haves and have nots,” he said.

Is narrowness a cause for concern?

“Not only is the IT sector leading the market, but stock leadership within the sector is also very narrow,” commented Matthew Page, co-manager of Guinness Global Equity Income. “Whilst the bull market of the past decade was led in part by the mega-cap tech rally, the rest of the index was rising too. This time around, it appears that very few mega-cap technology stocks are carrying the index and there is concern that such lack of breadth is not a stable base for an enduring bull market.”

Hear Hugh Grieves, manager of Premier Miton US Opportunities, explain how the US stock market has changed over the past decade:

AI has certainly been the focus of late but is there substance behind the hype?

“We think artificial intelligence is a very real opportunity, and we expect investment to explode,” said Martin Hawtin, manager of GAM Star Disruptive Growth. “This has major implications for the US equity market. The launch of ChatGPT in November 2022 has unleashed what we term “Digital 4.0”, which is more far reaching than any of its predecessors. We believe this wave will profoundly change the foundations of every business.”

Is it time to take profits?

According to Ben Leyland, manager of JOHCM Global Opportunities fund, “This has all the hallmarks of an emerging bubble, and we are surprised it is happening so soon after the traumas of. 2022.”

Brown Advisory’s Eric Gordon is more optimistic. “In recent weeks our team has been favouring the smaller, less expensive stocks that have been underperforming,” he commented. “That said, during a recent team research meeting, our analysts who cover the Sensational Seven stocks (excluding Tesla which we don’t own) were not inclined in an absolute sense to trim positions in those names given their favourable longer-term characteristics and return profiles.”

What other opportunities are there in the US?

Cormac Weldon, co-manager of the Artemis US Smaller Companies fund, likes US house builders. “There are a number of ways for investors to gain exposure to the cyclical US housebuilding sector which we think is well-placed for recovery and presents opportunities for investors,” he said. “Our favoured approach is to invest in suppliers, as these tend to have more control over costs and are not solely dependent on demand for new homes.

“Our biggest such holding is Builders FirstSource – the US’s largest supplier of structural building products. It supplies everything from cabinets and doors to pre-fabricated roofs.

As well as being well positioned for further recovery, the company benefits from the still-healthy market in renovating existing properties. It is also active in acquiring smaller suppliers in what is a highly fragmented industry.”

“The small and mid-cap universe is now priced at historic valuation discounts to large caps, which is a function of persistent underweight positions by investors over the last 10 years,” commented Bob Kaynor, manager of Schroder US Mid Cap fund. “Looking forward, small and mid caps are already pricing in an economic downturn. Once evidence starts to appear that the economy is indeed slowing, and as the market looks ahead to how a recovery will develop, these companies should start to be appreciated more. We are maintaining our conviction that US small and mid- cap stocks will lead market performance in the multi-year cycle ahead.”

A tricky moment for investors

“It’s a tricky moment for investors as we approach the early summer lull,” concluded Eric Gordon. “Most companies are in a “quiet period” and the flow of earnings reports has declined to just a trickle.

“Time will tell whether the next 5-10% move from roughly 4,3000 on the S&P 500 index will be up or down, but in the meantime, let’s celebrate a bull market that has surprised a large population of incredulous investors so far this year!”

*Source: FE fundinfo, total returns in US dollars, 12 October 2022 to 25 June 2023

**Source: FE fundinfo, total returns in sterling, 12 October 2022 to 25 June 2023


Photo by frank mckenna on Unsplash

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