Story of the month
US STOCK MARKET – OVERVALUED OR FAIRLY VALUED?
“Political stock markets have short legs” is a stock market adage that says political events such as elections or wars have no lasting impact on stock prices. Nevertheless, investors tend to become more nervous in the run-up to a US presidential election, especially if the campaign is highly polarising and the outcome is expected to be close. As a quality-focused investor, there is no way around the US, despite its high valuations. We take a look at the world’s largest capital market ahead of the US election.
WHAT DOES THE UPCOMING US PRESIDENTIAL ELECTION MEAN FOR THE STOCK MARKET?
The US presidential election is not only of interest to Americans, but also has global economic and political implications. According to the latest polls, the Democrats and their presidential candidate Kamala Harris are narrowly ahead of former Republican President Donald Trump. If the Democrats win, renewable energy, healthcare and technology stocks could benefit, while fossil fuels and financials would be among the losers. A Republican victory would benefit sectors such as energy, defence and financial services. Renewables and retail would be among the potential losers, as higher tariffs could be imposed as a result of Trump’s trade policies.
ARE US EQUITIES OVERVALUED OR FAIRLY VALUED?
Equity markets rallied throughout September. In a regional comparison, the US has seen significant price gains in 2024, while European markets have been somewhat weaker. At the same time, the resulting higher valuations have increased the vulnerability to price falls, as seen in the August correction. The current P/E ratio of the S&P 500 is around 24x, above the average P/E ratio of around 20x. In particular, US technology companies, viewed as the main beneficiaries of advances in artificial intelligence, have contributed significantly to the stock market’s strength in 2024. Technology companies make up around 40% of the S&P 500, but only around 10% of the STOXX Europe 600. In addition to the prospect of further interest rate cuts in the US and Europe, robust corporate earnings are helping to counter the stretched valuations to some extent. However, companies are finding it increasingly difficult to pass on price increases, with ongoing cost pressures (labor costs, interest rates) potentially leading to rising margin pressure for some companies.
On the other hand, US equities offer fundamental advantages: earnings growth of 15.3% is forecast for the S&P 500 in 2025 (10.8% in 2024) compared to 10.4% for the STOXX Europe 600 for 2025. Furthermore, the S&P 500’s return on equity of 17.5% is also higher than that of the STOXX Europe 600 (13.7%). Whatever the outcome of the election, US equities should always play a significant role in a diversified portfolio.
