Outlook for US equities
The stock market indices in the USA rose sharply last year - the Nasdaq 100, for example, by around 25% and the equity index S&P 500 by around 23%. By contrast, the gains for small and mid-cap equities were only around half as large. Looking at equity valuations, the US markets appear to be very expensive. But only at first glance, as the picture is heavily distorted by the large market heavyweights. Some of these are highly valued (but often justified by corresponding earnings growth) and they were also responsible for the lion's share of the price increases in the indices mentioned.
The situation is different for many other US equities, especially for small and and medium-sized companies. There is a whole range of favourably valued and at the same time good quality equities. Important to know: Equity indices are only ever a barometer or indicator for a more or less representative part of the market, and they can sometimes be misleading about the condition of the majority of equities.
The very uneven price performance between the stock market heavyweights and "the rest" has currently reached a level rarely seen before in history. What could happen now in a second presidential term of Donald Trump?
Positive outlook overall
Regardless of the change in power at the White House, the still robust US economy, continued innovations, and investments fundamentally continue to support the US stock market. Analysts currently expect solid further earnings growth for US companies in 2025, despite all uncertainties related to Trump. Although interest rate cuts by the US Federal Reserve have been partially priced out in recent weeks, they still remain a supportive factor for the stock market. There is considerable evidence that small and mid-cap stocks could catch up with the large market heavyweights.
US industrial equities might benefit from Trump
In concrete terms, this could mean the following for the US equity markets: One of the most important driving forces for the US economy is the high level of innovation. This is also reflected in the enormous importance of technology companies on the US stock market. The level of regulation is generally lower than in Europe, with the possible exception of the healthcare sector. The considerably lower electricity and energy costs compared to Europe are an advantage.
In this environment, US industrial equities could benefit under Trump, who was already endeavouring to bring previously outsourced industries back to the US during his first term in office. Any new tariffs or tariff increases would have an additional supportive effect. Profit growth at the largest companies is likely to slow in 2025 and will probably no longer significantly outperform the market as a whole. Following the euphoria surrounding artificial intelligence, investors could also take a closer look at whether and when the high investments made by many companies in this area will actually lead to higher revenues and profits.
Risk factors: Trump, interest rates and exaggerated expectations
One risk factor for the equity market is certainly that investors, but also companies, may associate exaggerated expectations with Trump's second term in office and tend to underestimate the risks of his policies for growth and corporate profits. In this respect, we simply have to wait and see what concrete measures Trump actually takes. Inflation and interest rates are another source of risk. Newly emerging inflationary momentum and rising capital market interest rates, as a result of higher import tariffs and/or further high budget deficits, would undoubtedly be negative for the entire US equity market. If, contrary to expectations, Trump goes about reducing the budget deficit significantly, the markets would probably be relieved of this concern. However, economic growth, which has also been fuelled by the very generous fiscal policy in recent years, would then probably be lower. Trump is in a bit of a quandary in this respect and so far, the statements from his camp are (as usual) contradictory.
Climate protection and sustainability at risk?
This also applies to the topic of renewable energies and sustainability. On the one hand, Trump would like to reduce or abolish many climate protection projects, such as subsidies for electric cars, "green technologies" and renewable energy projects. However, it is questionable whether he will succeed, as numerous jobs have been created in this area, including in Republican-governed states. Trump's majorities in the Senate and Congress are thin, meaning that the opposition of just a few Republicans could cause any legislative proposals to fail. Trump would also largely leave the field of green technologies of the future to other countries, especially China, which would contradict his endeavours to achieve American dominance in the most important technologies and markets. However, it remains to be seen to what extent Trump is willing and able to back up his rhetoric with action.
US equities too expensive by global standards?
Many investors shy away from the generally higher equity valuations in the USA compared to other countries. On the one hand, this is understandable. On the other hand, however, there are good reasons for this valuation premium. The USA is the world's strongest economic power with enormous innovative strength. US companies dominate in many future technologies and future markets - even if China is rapidly catching up here and increasingly taking over leading positions.
The USA has extensive natural resources, including large oil and gas reserves, as well as massive military power. It has the largest and most liquid financial markets, and the US dollar is the world's reserve currency. Not to be underestimated, the USA is considered a safe haven in times of global market turmoil.
As long as there are no substantial changes in these factors, the aforementioned valuation premium is likely to remain. In our view, it is therefore not an argument against the US equity market.
Good equity selection in funds is becoming even more important
The fund Raiffeisen Trajnostni ZDA delniški currently favours companies primarily from following sectors:
information technology,
healthcare, and
industry.
Equities of the healthcare sector have significantly underperformed the overall market in the last two years. Many healthcare and pharmaceutical equities have also reacted negatively to Trump's election victory. The new designated health minister and greater uncertainty surrounding drug prices and reimbursement of costs have weighed on sentiment and equity prices. However, it is also possible that too much negativity has now been priced in.
Currently, analysts anticipate positive earnings growth for the healthcare sector this year. The fund management of the Raiffeisen-Nachhaltigkeit-US-Aktien views the prospects for this area as quite favourable at present. Similarly, many small and medium-sized enterprises with relatively moderate valuations are also generally seen in a positive light.
In its stock selection, the fund Raiffeisen-Nachhaltigkeit-US-Aktien focuses on sustainability topics such as the circular economy, health, artificial intelligence, cloud services, water and waste management. The impact is calculated annually by Raiffeisen KAG.
Impact assessment
The impact is calculated annually by Raiffeisen KAG.* The data shown relates to the companies in the Impact assessment fund Raiffeisen Trajnostni ZDA delniški compared with the whole market.
Source: Raiffeisen KAG, own calculation, as of 28 June 2024.
*In order to calculate the effect of sustainable equity investments in the fund, we used the sustainability ratios of the companies found in their sustainability reporting. CO2 emissions are generally denoted in tons of carbon dioxide equivalents (CO2e), work accidents in lost-time-injury-rate, waste in tons and water consumption in m3. The key ratios for the individual companies were multiplied by their weight in the fund or in the overall market, and the results of each key ratio were compared. Currently, we do not calculate such ratios for the bond segment of the funds, as we think that the "sustainable footprint" is attributable to the company owners, i.e. shareholders, not to the creditors, i.e. bond holders.
The fund Raiffeisen-Nachhaltigkeit-US-Aktien exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.