How US 'exceptionalism' is supporting its equity markets

At a glance: 

• The US economy and its markets have outperformed most other regions in recent years. 
• During the Covid pandemic, the US Government and policymakers were on the front foot with regulation and stimulus, which helped consumers save more. 
• Inflation peaked earlier, and at a lower rate, in the US compared to the UK and Europe, while GDP growth has also been higher. 
• It is difficult to envisage that even high national deficit or political risk linked to the incoming presidential election could derail the long-term growth potential of the US economy.
• Technology, including AI, has helped propel US markets to fresh highs, though some worry that a potential bubble in prices may be emerging.

The US economy has powered ahead in recent years. This is in stark contrast to sluggish post-pandemic growth in Europe, and underperformance in China, which is yet to fully rebound from a bubble in its property sector.

While the ongoing strength of the US economy is by no means certain, especially given its high national deficit, its current position relative to other major economies makes it an attractive destination for investors.

Recent winners in US equity markets – namely technology and AI companies – are only part of the story behind US 'exceptionalism'. Here, we look at why the US is attractive to investors on a broad basis and why the outlook is promising. 

Stimulus put cash in consumers' pockets

The US Federal Government unleashed a significant amount of fiscal stimulus to keep the economy afloat during the pandemic, approximately $6.2 trillion according to one Washington think tank.

Additionally, the Federal Reserve used quantitative easing to increase its balance sheet by around $4.8 trillion by May 2022, with two-thirds coming during the initial stages of the pandemic in 2020. The goal was to stabilise the economy by helping money flow through the system. 

These stimulus packages distributed cash to consumers, alongside other measures such as rental assistance and the pausing of student loan payments.

Together, this resulted in a significant increase in the median cash balance (the amount of money on hand at any given time) of the US consumer in early 2021. JPMorgan Chase Institute puts this increase at 66% compared to 2019 levels. 

US consumers were therefore in a much stronger position than other consumers around the world. This gave the US economy a head start when it exited the pandemic in 2021, a key factor cementing its exceptionalism in the years to follow.

Also, many consumers still had memories of the 2008 global financial crisis. They continued to save more cash, especially as pandemic support packages expired, and this helped buffer the impact of higher inflation. 

This cushion for consumers was combined with a 21.9% increase in wages from the end of 2019 to early 2024 (Chart 1). This helped put the US economy in good stead ahead of expectations of a recession that the consensus said would occur late 2022 and during 2023, but has yet to arrive.

Chart 1: US average weekly earnings (31/12/2019 = 100)

The impact of inflation

Like the UK and Europe, the US was not immune to supply chain disruptions and a rise in energy costs resulting from Russia's war on Ukraine.

However, given the US produces oil and gas domestically, the impact there was lower and shorter in duration. US inflation peaked at 9.1% in June 2022. This compared to 10.6% in the UK and 11.1% in the eurozone, both in October 2022. As a matter of fact, inflation in the UK and Europe ran above the peak in the US for nearly a year.

Still, the Federal Reserve was forced to pivot aggressively into tightening mode to combat the impact of price rises felt globally. It increased interest rates by 5.25% in the space of 18 months. This was good news for those sitting on cash, with saving rates also going up.

All in all, the stimulus measures and underlying health of the consumer propelled US economic activity. Most recent data shows US GDP coming in at around 7.1% higher than the UK, and 4.6% higher than the eurozone, from their respective starting points pre-pandemic in the final months of 2019.

Chart 2: US, UK, and eurozone growth since 2019

US: The home of innovation

We can't ignore the impact of technology stocks, which fuelled the rise of US equity markets through the 2010s. Technology stocks now comprise nearly 30% of the S&P 500. This is much higher than other developed equity markets, which have a greater exposure to industrials and financials, and around 10% exposure to technology stocks.

More recently, the focus has been on artificial intelligence, especially since the breakthrough of generative AI in early 2023. Technology giants, including Nvidia, Alphabet, and Microsoft, have benefited from this, with recent earnings helping to drive the US market even higher.

The charts below show the performance of the benchmark US equities index, the S&P 500, versus the MSCI EAFE. The latter represents the performance of large and medium-sized companies across 21 developed markets, including Europe, Australasia and the Far East.

Chart 3: S&P 500 vs MSCI EAFE (since 31/12/09)

Should we fear a tech bubble?

Given the hype surrounding AI, and the extraordinary outperformance of US technology stocks, some commentators fear we may be witnessing the emergence of a bubble, similar to the dot-com bubble which burst in 2000. A bubble is when price deviates significantly from how a company might normally be valued due to market over-optimism.

There are also increasing concerns about the level of concentration within the S&P 500, with a few big companies having grown to make up such a large share of the index. 

So is a tech bubble forming? Hugh Gimber, a global market strategist from the market insights team at J.P. Morgan Asset Management, said: "Over the past year, the increased concentration of the US stock market has become a source of interest, if not concern.

He added: "Close to 90% of the price returns delivered by the S&P 500 over 2023 can be attributed to the performance of just seven stocks: in a year where the S&P 500 returned 24%, the median stock in the index returned a less impressive 8.2% in comparison. The S&P 500 now has a higher level of concentration than was experienced during the 2000s tech bubble". 

Indeed, according to Bloomberg research, concentration is higher now than at the peak of the aforementioned bubble in the late 1990s.

However, performance appears to be based on the profitability and growth potential of the individual companies, rather than hype or speculative excess. In other words, earnings are more aligned with share price now than they were in the 1990s, but concentration remains an issue, with the top seven companies in the S&P 500 making up a fifth of its overall earnings.

All in all, the combination of stronger economic growth relative to the rest of the world - together with the increased exposure to technology companies in the major US equity indices - is leading to a resurgence of US exceptionalism.

How Nutmeg is allocated to the US

At Nutmeg, we took an overweight position in US equities in our Fully managed portfolios in late summer 2023, and we continue to maintain this positioning. We do, however, remain vigilant about any potential problems that could emerge in the US economy such as its high national deficit.

We'll also be keeping a close eye on the US presidential race, which will gather momentum in the second half of the year. Our analysis will focus on the economic policies of both candidates – and their potential implications for the US economy – rather than adjusting the portfolios in response to market speculation about the likelihood of who will win.

Those clients who are interested in investing with more of a tilt to technology on a long-term basis, and who qualify with a suitable risk level, may be interested in the Technological innovation theme offered as part of our new Thematic investing portfolios. 

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Figures refer to past performance, which is not a reliable indicator of future performance. 

Thematic investing carries specific risks and is not for everyone. There is no guarantee that development of the trend will contribute to positive investment outcome. All Nutmeg themes, including Resource transformation, should not be considered as incorporating ESG considerations.