US stocks: The bull market continues

US stock markets are on the rise. What lies behind it?

The rally on US stock markets seems unstoppable. There's nothing unusual about that, however – at least from a historical point of view. In addition, the US has unique locational advantages – its economic strength, innovative capacity, risk culture, and also geopolitics. Read the article to find out why the US bull market is likely to continue, and what investors should bear in mind.

Historical comparison of US highs

The profits generated by the US economy and stock markets seem to be almost immune to gravity. It was a different story five years ago, when the expected earnings per share of the MSCI US Index were almost in line with those of the MSCI World (ex US). Today, at USD 230 per share they come in at ten times more than those of the benchmark for the rest of the world (USD 23.90 per share). This widening gulf in earnings is due in part to share buybacks, which are popular in the US. However, the buoyancy of the S&P 500, which has soared by 42 per cent since 12 October 2022, is also remarkable. Further upside is likely.. After all, its performance predominantly stems from earnings yields and not only from rising valuations. And because a small number of large corporations—the Magnificent 7—are behind this trend, there still is scope for other companies to follow suit.

Such success is not new. Let's compare: in 1969, per capita economic output in the US, at 5,000 US dollars, sat at a similar level to that of Germany. Today, according to data from the International Monetary Fund (IMF), the corresponding figure for the US outstrips its German equivalent by 52 per cent, at USD 80,412 versus USD 52,823. Furthermore, it is currently six times that of China (USD 12,541), which is the second-biggest economy on Earth. In 1969, the S&P 500 stood at 92 points. Its current level is more than 50 times higher. That said, back then the US dollar was worth more than four Swiss francs. The greenback’s depreciation is perhaps the most visible downside of the US’s multifaceted exceptionalism.

Let the good times roll: reasons to invest in the US

Some market watchers may be asking whether the US bourses have perhaps already priced in the best of all possible future scenarios. This concern is as old as the stock markets themselves. It has not been vindicated over the past few decades, and is unlikely to be borne out in the 2020s either. Below you will find nine reasons:

1. «Made in the USA»

The reindustrialization of the US economy is set to be a standout legacy of the Biden Administration. The US government’s three major infrastructure programs—the Inflation Reduction Act, the CHIPS Act, and the Build Back Better Act—are not only creating jobs, they are also boosting productivity thanks to shorter supply chains, enhanced automation, and plentiful sources of energy. A new factory is opened in the US almost every week. This boom in factory construction is not just boosting the economy, it is also supporting our roaring twenties scenario of a multi-year phase of productivity-driven and disinflationary economic growth.

US economy: Factory construction is booming

Factory construction in the US is booming

Source: Macrobond, UBS, as of December 2023

2. Remarkable US corporate earnings

Once again, the latest US corporate earnings have outstripped analysts’ expectations. There are almost no tangible signs of a broad-based slump in revenues among US corporations. It comes as no surprise that most earnings expectations for 2024 and 2025 are rising, albeit not to dizzying heights as yet.

In addition, medium-sized companies are optimistic despite the challenges of inflation, taxes, staff shortages, and supply chain disruptions.

3. Falling US inflation

Despite renewed interruptions to supply chains, US inflation is heading down. Firstly, goods inflation is still in retreat. China and many US retailers have discounted their selling prices because consumers are currently spending more on travel and services than physical consumer goods. Secondly, the gradual adjustment of rents is distorting reported core inflation in the US. The recent decrease in national US rent indexes suggests that the official rate of core inflation (3.9%) will likely be lower once the fall in rents is taken into account. The markets are naturally pricing in information such as this. However, once this data becomes official, interest rates will probably slide again, benefiting the markets.

4. No end to the bull market

The current US bull market has increased by 42% since October 2022 and now appears to have reached the stage of a "mature" bull market. Such a phase can last a long time. The formerly narrow market leadership has become more broad-based. Following some self-critical introspection, many institutional investors are trying to get a foot in the bull market having had too little exposure to it until now. To sum up, the present US bull market might still have enough momentum for several years yet.

5. Reasonable valuations

Most US corporates are still trading at price/earnings (P/E) ratios that are lower than they were in early 2022. Even the valuations of the Magnificent 7 cannot be compared with the exuberance of the dotcom bubble. These corporations’ business models are capital-efficient, highly profitable, and relatively low-risk. The P/E ratios of small and mid caps in the S&P 400 and S&P 600 are mostly between 14x and 15.5x. At 11.8x, there is a gaping differential between the P/E ratios of the value and growth styles. Meanwhile, the equity risk premium of the S&P 500 (3.68%) is broadly in line with the average over the last 40 years. In comparison, many equity risk premiums dropped below 0 per cent during the dotcom bubble.

6. Technology, innovation and tipping points

Politics, the economy, and the environment are currently full of tipping points. They tend to occur thanks to a combination of the right timing and a proactive entrepreneurial approach. The earnings growth generated by US chip manufacturer Nvidia clearly demonstrates the power of economic and technological tipping points. Could these also result in similar profit growth for other companies? Who knows? Experience has taught us that several tipping points tend to arise simultaneously.

It may be that the current AI euphoria is just "hot air." However, the boost to the economy from the expansion of digital infrastructure—on the part of governments, companies, and private households alike—is akin to a runaway train. This is how disruption works. Everything stays the same for a long time—until it suddenly changes.

US stock market: Nvidia's earnings growth

Nvidia’s earnings growth demonstrates the power of tipping points

Source: Bloomberg, UBS, as of 1Q 2024

7. A symbiosis between innovators and capital markets

The US is home to the world's most efficient and powerful capital and venture capital markets. A comparably liquid secondary market for start-up investments, or institutionalized risk culture, does not exist in Europe or Asia. This creates a global competitive advantage for the US thanks to the unique symbiosis between innovators, companies, and providers of venture capital. In addition, the country is home to the practice-oriented Ivy League universities, which attract talent from across the globe year after year. Last but not least, the US economy's size, consistency, and purchasing power are attractive features. According to the IMF, economic output across the pond surpasses that of every other nation in the world at almost USD 27 trillion.

8. The world’s fastest-growing economy

The exceptionalism of the US is reflected not only by its geopolitical status and unrivaled wealth of raw materials, but also by its economy. According to the OECD, the US economy has expanded at a rate of around 8.2 per cent in real terms since the fourth quarter of 2019. The growth rate for the G7 nations over the same period is 5.1 per cent, with France and the UK coming in at 1.8 and 1 per cent, respectively, compared to only 0.1 per cent in Germany. These differences are attributable to more than numbers alone. Many young people are fascinated by the appeal of the US economy. The terms Silicon Valley, start-ups, and venture capital conjure up the dream of a circular economy in which entrepreneurial risks are viewed as a window for progress and sustainable growth is deemed a global opportunity.

9. Wealthy US consumers

Consumption and productivity gains are currently supporting the US economy. It's not surprising that US consumers spend a lot: US private households' equity capital and pension savings are currently higher than ever. The lower and middle income classes are benefiting from rising real wages, while US private debt and its rate of growth are relatively low.

Net wealth of US households remains high

Net wealth of US households remains high

Source: Macrobond, UBS, as of 3Q 2023
Note: The areas in gray denote recessions according to the NBER.

What investors should look out for

The extraordinary history of the US is also the story of a unique symbiosis of several factors, including power, economy, and geography. All of these elements have generally melded together to create economic advantages in the recent past. Investors are advised not to run counter to this trend. The US offers a unique platform for new ideas:Whether investments in themes of the future such as infrastructure, the energy transition, sustainability, technology or robotics are involved, US companies are nearly always in the vanguard. Therefore, investors cannot afford to be underinvested. Equally, they need to be wary of concentration and overexposure. As a guideline, the US accounts for 63 per cent of the global stock market capitalization. We are overall neutral on US equities in our global preferences, but within the market, we like tech and small-caps that contribute to diversification.

Additional opportunities for investors in private markets:despite the country’s leading status in terms of stock markets, most US companies remain privately owned and managed. Yet the efficient US capital market enables investors to invest in start-ups and private equity more easily than anywhere else. Its historical success is the biggest testimony to its unwavering potential.

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