Can US outperformance continue?
The US stock market has performed well recently but can it deliver once again for investors in 2025 and beyond?
The US stock market has performed well recently but can it deliver once again for investors in 2025 and beyond?
US stock markets have been on a strong run since October 2023 and in 2024 the S&P 500 delivered one its strongest years in its history. With such a healthy recent run of performance, can the US stock market deliver once again for investors in 2025?
With the Republican Party winning a clean sweep in November’s election President Donald Trump may have greater freedom to implement his policies in 2025 than he did in his first term. How Trump’s policies get implemented could affect the US stock markets performance next year. Importantly, Trump likely sees stock market performance as a measure of success, so investors’ interests should be aligned with the new administration.
Although Trump is inheriting a growing economy and a healthy stock market, he may have limited room to manoeuvre. The economy is still recovering from the 2021-22 inflation shock but has less spare capacity than it did in 2017, due to reduced household savings, larger government debt and higher interest rates.
Trump looks set to push ahead with raising tariffs shortly after he enters office this month and has already warned China, Mexico and Canada, some of the US’s major trading partners, that he will place tariffs on their goods. However, he has already stated his objective is to bring manufacturing back to the US so tariffs could be raised incrementally or be targeted to encourage China and other countries to set up factories in the US. If this transpires, the impact on US inflation and growth could be limited.
Trump’s plan to crack down on immigration could have a greater impact on the economy depending on how many people are affected. If all 8.3 million working illegal immigrants in the US were deported it would have a devasting impact on the US economy. The Peterson Institute for International Economies estimates it would take 7.5% of gross domestic product (GDP) during Trump’s four-year term.1 In the first Trump administration 450,000 people were deported each year2. Should we see a similar outcome then growth may slow rather than lead to higher wages and inflation.
Tax cuts could be a priority in 2025, with the extension of the Tax Cuts and Jobs Act expected and possible cuts to corporation tax. However, tax cuts take time to feed through the economy and are unlikely to affect growth until 2026 although any announcements may impact the stock markets sooner. On balance we believe his policies are pro-growth and could support the stock markets.
The US has been the standout market since it recovered from the Global Financial Crisis. The country has a well-earned reputation for its strong business focus and an innovative and capitalist culture, which has helped it to significantly outperform its peers. There are four reasons we believe this could continue in 2025:
Momentum
The US economy has surprised many with its resilience over the past couple of years. Despite high inflation and rising interest rates the economy has grown 3.2% in 2023 and is forecast to have grown 2.8% for 2024.3 Business activity is robust and confidence amongst business managers is outstripping European peers with the last Purchasing Managers Index for October coming in at 54.1 compared to 50.0 for the Eurozone, where above 50 points indicates expansion.2
Earnings
US companies are forecast to see earnings per share (EPS) grow 13.8% over the next 12 months significantly higher than that expected for European equities where EPS growth is forecasted at 7.4%.4 This gap is the widest it has been for six years and, with the outlook for US earnings more positive than Europe, it could widen further.
It’s not just the performance of the ‘Magnificent Seven’ stocks that is driving the US market - less than 10% of companies in the S&P 500 are expected to see their earnings fall.3 While valuations in US equities, particularly in the Magnificent Seven stocks, are higher than in other stock markets, they are currently being supported by a superior earnings growth outlook.
Profitability
The US market is renowned for being competitive with only the most effective companies able to thrive. This generates efficiencies resulting in lean companies with higher levels of profitability. The US has had a profitability premium over other developed economies for much of the past 50 years. This premium has continued to increase, particularly following the end of covid lockdowns, but remains someway off the peak seen during the late 1990’s5. With Trump keen to cut red tape and favourable economic conditions this premium could grow further as costs fall.
Structural advantages
The US continues to have several favourable structural advantages over its developed market peers. The country has independence in energy, in contrast to Europe. Its demographics are more favourable than most developed markets although Trump’s immigration policies could weigh on this. America is a technology superpower, with many companies enjoying effective monopolies in many areas of new technology including AI.
US exceptionalism is predicted to continue and although the market has rallied on the back of Trump’s election victory there are still concerns and risks. Valuations are stretched in some areas of the market, such as the ‘Magnificent Seven’ companies, which could present a risk to investors should interest in the AI theme wane. However, there are still opportunities in the broader market supported by a growing economy. We have increased our exposure to the US market heading into 2025.
Some of our Financial Services calls are recorded for regulatory and other purposes. Find out more about how we use your personal information in our privacy notice.
Please complete this form and let us know in ‘Your Comments’ below, which areas are of primary interest. One of our experts will then call you at a convenient time.
*Your personal data will be processed by Evelyn Partners to send you emails with News Events and services in accordance with our Privacy Policy. You can unsubscribe at any time.
Your form has been successfully submitted a member of our team will get back to you as soon as possible.