'Ignore the gloom: US stocks are a buy'

It has taken barely a month for consensus opinion to shift from thinking that the US market is invincible to declaring that US exceptionalism is over, so its market will underperform indefinitely. And all because president Donald Trump is causing chaos and confusion with tariff proposals, which not only change from day to day, but have also been the preferred economic tool of the US since its creation, as Marc Levinson of Bloomberg reminds us.

The S&P 500 did fall 20% from its February peak to its early April low, but is now down just 6% in 2025. Remember that at the start of the year, the US was trading on 22.4 times expected earnings for 2025, so it was ripe for a setback regardless of Trump’s antics. It fell to a multiple of 19.2 on 8 April, but is now back up to 20. Meanwhile, UK and European markets are up for the year to date. So what’s all the panic about?

With energy prices low, interest rates falling and no evidence of financial distress, a recession in the US looks unlikely. Economic growth is probably slowing, but to a pace still far better than is likely to be achieved in the UK and Europe.

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Analysts are cutting profit forecasts, but they often do, only to see actual quarterly results beat expectations. First-quarter results for US firms are beating expectations by more than 7%, well above the usual amount. As a result, although the forward earnings multiple of 20 is not exactly cheap, it is reasonable given earnings growth and a ten-year government bond yield back below 4.2%.

The Economist is a contrary indicator

“Is this the strongest buy signal ever?” asks Ed Yardeni of Yardeni Research. He contrasts the popular extreme pessimism with a reasonable economic and corporate outlook. He notes four consecutive bearish cover stories of The Economist – “Only 1,361 days to go; How a dollar crisis would unfold; The age of chaos and Ruination day. The Economist’s cover, as well as that of other business magazines, has a long history of being a reliable contrary indicator.

He also notes that sentiment indicators for the stock market have hit rock-bottom levels. “But if our suspicions are right, and some hints of dawn reappear sooner rather than later, then writing off 2025 as an unmitigated disaster for stocks might be a costly mistake.” Investors may need to show a little patience and there may be further setbacks ahead, but it is likely that the lows of the year have been seen.

What should investors buy? At times of market stress, it usually makes sense to buy the obvious funds – rather than specialist ones, those on large discounts to net asset value (NAV), or those demonstrably cheap. Such funds do not lead the market up. Well-diversified global trusts such as Alliance Witan, F&C and JPMorgan Global Growth & Income all have solid long-term records and move with the market.

Contrarian investors will want to bet against the prevailing conviction against the US and technology and growth. That suggests JPMorgan American, Scottish Mortgage and the two technology specialists, the Polar Capital Technology Trust and the Allianz Technology Trust. US outperformance on the scale seen in the last 20 years is ultimately unsustainable, but it may not be over yet and even if it is, the US should still perform well in absolute terms.

Those nervous about relatively high US valuations could look at the two US small-cap trusts, Brown Advisory and JPMorgan US Smaller Companies. The S&P 400 mid-cap index trades on a multiple of 14.3 times expected earnings and the S&P 600 small-cap index on 13.8 times. US market leadership will change; it may no longer be led by all of the “Magnificent Seven”. For example, Marc Weiss of technology experts Open Field Capital believes that “AI value is shifting rapidly away from silicon chips and models (ie, Nvidia) towards AI applications”. This opens up a new field of opportunities.

Still, “the Magnificent Seven are still magnificent”, argues Yardeni, who points out that “the forward price/ earnings multiple of the Magnificent Seven plunged from 30 at the start of the year to 21.7 on 8 April”. Following good quarterly results, the Seven are now leading the rally. A rising yen is more likely to attract capital into Japan, where a very positive outlook for investment has been undermined by a weak currency.

The value funds, Nippon Active Value and AVI Japan, have been by far the best performers for the last five years, but the growth-orientated Japan trusts managed by Baillie Gifford, Fidelity and JPMorgan may start to catch up. The CC Japan Income & Growth and the Schroder Japan Trust are a good compromise.

It’s hard to see anything in the market that is overpriced, with one exception: gold, as expensive in real terms as it was at the 1980 peak. Goldman Sachs forecasts that the price will reach $4,000 an ounce, but those with long memories will recall that in 2008, with the price of oil at $150 a barrel, Goldman Sachs was forecasting $200 a barrel.

The price soon collapsed and has never seen $150 a barrel again, securing Goldman Sachs’ reputation for being a contrary indicator. As Keynes said, “my central principle of investment is to go contrary to general opinion on the ground that, if everyone agreed about its merits, the investment is inevitably too dear and unattractive”. That rationale supports buying shares and selling gold.

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