Key factors driving the country’s relative outperformance include robust consumer spending fuelling healthy corporate profits, productivity gains, an ongoing AI investment boom and supportive fiscal policies, ClearBridge Investments said in a recent note.
The fund manager challenged concerns about a potential market pullback, stating that the S&P 500’s recent gains exceeding 20 per cent do not necessarily signal a downturn.
Historical data suggests that while returns may moderate, they typically remain solid in the years following such strong performance, the fund manager said, adding that the current rally in US stocks is “far from the longest without a correction”.
According to Jeff Schulze, ClearBridge’s head of economic and market strategy, the likely continuation of supportive fiscal and monetary policies is the key to sustaining US consumer resilience in the coming years.
Schulze also pointed to ongoing productivity gains as a significant contributor to economic growth, creating a strong foundation for healthy corporate profits and outsized market performance.
“While it may be tempting to think the US is due for mean reversion, investors will likely have to wait a little longer, given our expectation that the fundamental drivers of US exceptionalism will remain in place in 2025,” he said.
Schulze noted that while some may believe the market is “due” for a downturn due to the gambler’s fallacy, historical data tells a different story. After two consecutive years of gains surpassing 20 per cent, the S&P 500 has generally maintained steady, though slightly more moderate, returns. On average, these returns reach 12.3 per cent, with positive performance recording 75 per cent of the time.
“We believe investors should remain cognisant of the gambler’s fallacy or the notion that the next coin flip will be influenced by the last. Should a period of near-term digestion emerge, we believe long-term investors would be well-served to take advantage and deploy capital,” Schulze cautioned.
Broadening of earnings participation
ClearBridge Investments anticipates a shift in the concentrated earnings growth that has dominated recent years, with the 10 largest companies in the S&P 500 accounting for a record 38.7 per cent of the index. This trend is expected to ease in the coming year, potentially paving the way for greater market breadth.
Such a development, according to the fund manager, could provide a favourable environment for active managers, who typically perform well when gains are more evenly distributed across the broader market.
“Market concentration mean reversion could begin to play out in 2025 due to fundamental drivers like relative earnings growth,” Schulze said.
Cautious on US extreme pricing of ‘US exceptionalism’
In a separate note, Martin Conlon, head of Australian Equities at Schroders, acknowledged the resilience of the US economy, which has exceeded expectations, and noted the continued strong demand for US dollar assets, despite challenges in the Treasury market.
However, he cautioned that global markets have placed an “alarmingly large wager” on the ongoing outperformance of the US economy.
According to Conlon, his observations of the Australian market over the past few quarters show that this overreliance on US economic strength is often mirrored in other markets, as US-driven trends tend to influence global markets, including those outside of the US.
He cautioned that while the US equity market remains a central force in global capitalism, the main challenge for investors is accurately assessing the sustainability of US economic “exceptionalism”. He pointed out that current market pricing suggests an overly optimistic outlook.
“Indicative global benchmarks such as MSCI World are more than 70 per cent US exposed, while the top 10 stocks are all US and nearly 25 per cent of the index.”
Conlon added that it remains difficult for investors to separate the sustainability of the US economy from confidence in the government’s ability to support asset prices and the economy through rising money supply and deficit spending.
As capital increasingly flows into US assets, he noted, there has rarely been a time in history when the bet on US exceptionalism has been as large as it is now.
“Unsurprisingly, this has left those with an appetite to seek diversification elsewhere with a fairly broad array of far more sensibly priced opportunities.”
