Global equities – striking the right US balance within portfolios
Market concentration is a risk across the whole of the global equity universe and not unique to the US, as our experts explain.
Profily autorov
Earnings trends and valuation discrepancies suggest pockets of opportunity can be found in all regions, including the US. But away from a news cycle dominated by the “Magnificent 7” it is possible to see how the fundamentals of the “S&P 493” have more in common with other markets, something rarely commented on. Why are we still talking about the dominance of the US and the Mag 7?
Alex Tedder (CIO Equities); Lukas Kamblevicius (Co-Head QEP); and Nick Kirrage (Head of the Global Value Team) dig into the nuances of the global equities debate. Five of their key observations are highlighted below.
1. Don’t overlook the rest of the market, or ignore the Mag 7
Alex Tedder: The focus on the US and the Mag 7 companies persists due to their immense size and influence. They now dominate the index and make up around a third of the S&P 500. This dominance results from their sustained success, ensuring that their performance heavily impacts the overall index. Consequently, while smaller companies can be overlooked, the attention remains on these seven companies because of their critical role in driving index performance. That's the issue.
Nick Kirrage: In some respects, the story people see is a news cycle completely dominated by these businesses. They are great businesses, but we would argue that the opportunity is elsewhere. If you're an active manager, if you're a stock picker, it's that opportunity set you want to try and find rather than just gravitating towards the biggest investments.
2. Changing earnings growth dynamics
Lukas Kamblevicius: Our day-to-day job is ultimately to deliver positive returns for our clients. We have come to a point where it's hard to see the Mag 7 delivering on historic growth rates. As a result, I believe that investors will start looking to the rest of the universe such as European markets where the valuation multiples are much more attractive, and the earnings growth is starting to show evidence of coming through so far this year. The earnings growth divergence between the US and larger cap space, versus the rest of the world and the medium-sized companies is converging. That might lead to a broadening of the market, where more overlooked pockets start to perform.
Earnings growth trends converging within the US
Year-on-year EPS growth
Source: FactSet data from December 2024. Year on Year EPS growth over each calendar year, where 2025, 2026 & 2027 are based on forecast data.
3. US market concentration is not unique
Nick Kirrage: It's not that the levels of concentration within the US are new. We've seen this concentration in the US back 50, 60 years ago, and you see these levels of concentration everywhere else. If you're a UK investor, it’s been the norm for many, many decades and I don't think it’s a problem. I do think that within the US, it's such an enormous market in and of itself that there are layers, and in some respects it's a two-tier market.
The Mag 7 have seen extraordinary productivity gains, extraordinary earnings growth and sales growth. If you strip that out of the market, the earnings growth of the S&P 493 is broadly comparable with international markets over 10 years. This is pretty extraordinary and something not many people talk about.
Outside of the Mag 7, there are many good businesses that are actually very cheap in the context of history. One area investors need to be careful about is swapping one home market bias for another home market bias. We need to make sure we find a way to drive diversification through portfolios despite that very large concentration that exists.
4. Concentration risk across the whole of the equity universe
Lukas Kamblevicius: We tend to talk about the dominance of the Mag 7 in the US that represent around 30% of the overall index. But if you look around the world, whether it be the UK, select countries in Europe or emerging markets, the concentration risk is at a roughly similar level. It's unfair to categorise the US as the only regional market on a global basis that carries that concentration.
On the other side of this, a number of pockets in the market in both the US and the rest of the world have been overlooked. Many areas of really good quality businesses are trading at a significant discount from a valuation perspective. Following the pick-up in volatility so far this year the market has started to question the allocation to these “over-crowded” richly valued pockets and has begun to look for other opportunities, which are broadening out.
5. The risks around American exceptionalism
Alex Tedder: American exceptionalism, “America First” resonates with voters, but it does have distinct dangers. Historically, aggressive tariff policies, any aggressive exceptionalism, has usually ended in tears. I don't see this being any different this time around.
The rhetoric from the White House has been very assertive, and the implications of that are potentially very negative if that translates into reciprocal responses from other nations, as so often happens. A mitigating factor might be that, as we've seen with Trump, he tends to push the rhetoric very far until he gets a reaction; and then backs away.
So, it may well be that the current “sabre-rattling” (tariffs being the weapon of choice) doesn't play out in action, at least not to the extent originally indicated. That approach would lead to change, but it might not all be bad change. Indeed, it some cases it might help address some of the imbalances that have arisen as a result of globalisation over the past two decades. As mentioned, the precedents aren’t great, but if Trump is smart, he might just succeed in creating needed change without seriously damaging the world order. We live in hope.
Profily autorov
Témy