2024 has seen elections and changes of government in the UK and US, war continuing in Ukraine, conflict igniting in Lebanon and now the fall of Assad in Syria. Outflows from UK equities have continued, despite a positive return for the FTSE all share year to date. Across the Atlantic, the S&P 500 is on track to race away with a remarkable second year of 25%+ gains. And rather than showing signs of fear, market participants are feeling exhilarated!
Along with retail investors, virtually every Wall Street analyst predicts US stocks will continue outperforming the rest of the world in 2025, with another 10% gain on the cards if they are to be believed. (Sources: FT: How ‘the mother of all bubbles’ will pop, Factset Industry Analysts Predict the S&P 500 Will Close Above 6,600 in 2025).
With China struggling to restart the economy and Europe experiencing political turbulence and low growth, many investors view the US as the only game in town. As has always been the case, fund flows have followed optimism.
The US equity market now makes up more than 70% of the MSCI World Index. That is more than double the level in the 1980s and compares to around 26% of global GDP (Source: IMF DataMapper).
This remarkable rise has tested many historic boundaries. As you can see from the chart below, over the past 50 years the US population has grown by 1.6x, US GDP by 19x, US public debt by 75x and the equity market by 163x.
While share prices should follow earnings, not GDP, corporate valuations must still be anchored to something real for them to make sense. It is worth remembering what it felt like in late 1999 and late 2021, the last two occasions in the past 75 years with similar conditions.
Another unusual signal: Berkshire Hathaway was a net seller of around $35bn in equities in the third quarter and for the first time since changing its buyback policy in 2018, it bought back no shares (Source: Warren Buffett Breaks 6-Year Streak, Doesn't Buy Back Berkshire Shares Despite $320B Cash Pile | IBTimes UK' International Business Times, 19 December 2024).
The phenomenal rise in the US equity market has not been broadly spread but has been concentrated in some of the largest companies, (mainly the Magnificent 7: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla). In the history of US equities most measures show the current level of concentration is at peak.
There are some fantastic large U.S. companies that have global leadership. However, there seems to be little in the way of discussion around what is discounted in current share prices.
When markets reach concentration extremes such as those shown above, it has generally coincided with one of two things; a recession, or a bubble that pops followed by a change in market leadership. Current conditions make the latter feel the more likely scenario, but both can be painful. Is this an inevitable car crash? Exiting the market completely and timing a return often fails to pay off in the long run, so what can be done?
We can’t help noticing the lack of interest in share valuations, which is always a dangerous sign. In recent meetings, some wealth managers admit to moving funds into US mid and small capitalisation business. Maybe the change in leadership has already started. We have even seen some buying UK funds again!
They might be on to something. We have passed the danger signs on the road. Valuation protection is the seatbelt - time to put it on.
Graham H Campbell
Co – Manager of RGI Global Income & Growth
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This document has been prepared by River Global Investors LLP (“RGI”). RGI is authorised and regulated in the United Kingdom by the Financial Conduct Authority (Firm Reference No. 453087) and is registered in England (Company No. OC317647), with its registered office at 30 Coleman Street, London EC2R 5AL. The value of investments and any income generated may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. Past performance is not a reliable guide to future results. Changes in exchange rates may have an adverse effect on the value, price or income of investments. This article does not constitute an investment recommendation and should not be used as the basis for any investment decision. Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article. Please note that individual securities named in this article may be held by the Portfolio Manager or persons closely associated with them and/or other members of the Investment Team personally for their own accounts. The interests of clients are protected by operation of a conflicts of interest policy and associated systems and controls which prevent personal dealing in situations which would lead to any detriment to a client.
