Turning a cold shoulder to the US market remains a bad idea.
For any attentive investor, the outperformance of US equities against European equities has been massive for years. The statistics don’t lie. With the exception of 2017 and 2022, US equities have systematically outperformed European equities in recent years. According to Christopher Dembik, investment strategy advisor at Pictet AM, “With just 4% of the world’s population, the United States accounts for 25% of global GNP and 31% of household wealth worldwide, and represents 50% of venture capital investment on the planet
Even more tellingly, since 1991, GDP per capita in the United States has grown 30% faster than in the eurozone. US corporate profits over the same period more than doubled. This year, it is the only major country whose growth will exceed its potential, and the United States is the only country with a presence in the entire semi-conductor value chain, which is so important to artificial intelligence (AI). While Pictet AM remains committed to equities for 2025, its preference is for technology stocks, mainly American.
Some will complain about higher rates across the Atlantic. Rates will remain higher in the United States, but are expected to be around 3.75% – 4% at the end of the year, compared with levels perhaps close to 1.80% in Europe. But these higher US interest rates are justified by the fact that growth is higher than in the eurozone. However, barring any major surprises, changes in interest rates should not be the main parameter determining the direction of the markets this year.
With a favourable yield spread, the US should attract a lot of fresh money. One factor supporting equities is that the central banks, which steer the economy, are in the process of cutting interest rates (including in emerging countries) with the aim of moving towards a neutral level in the face of the risk of inflation, which has become low. This downward movement in interest rates will reduce the returns on money market funds, which are still flush with cash, and push outflows into the equity markets, for example. This wave of funds will support the indices, and is already adding to the many share buy-backs by US companies, facilitated by the solid growth in their free cash flow. The backdrop to this is the example of NVIDIA, which has managed to multiply its free cash flow by 15 in the space of two years, to some extent justifying its surge on the stock market.
The exceptionalism of the US economy may continue in 2025, under a new President who intends to step up support for the economy at the expense of budget balances. But the Trump administration could use tariffs as a lever to reduce debt.
Is inflation overestimated?
Given the inflationary fears lurking around the new president’s economic decisions, however, there is little chance that the Trump programme will cause inflation to soar, as it will not be fully implemented, according to Christopher Dembik. In a Mano Mano, Trump uses it as leverage to obtain concessions with a difference between words and deeds. As a result, long rates should ease over the summer.
In any case, crisis, war, pandemic, whatever happens, Democrat or Republican in power, the US stock market always comes out on top. The situation is likely to be repeated again this year. And for investors who feel dizzy after a year of strong index growth (+23.3% for the S&P 500 in 2024), the average return for the 12 months following a year of growth (such as 2024) is also up, according to the statistics. In fact, data observed over a period of almost a century, from 1928 to 2023, shows that the following year offers, on average, a further 8.92% rise in the stock market. Christopher Dembik believes that this statistic is likely to hold true again this year. This does not mean that there will not be a stock market correction. On the other hand, it will not call into question the fundamental upward trend in US equities.
AI, renewable energy and water
Another argument that will support growth is that regulations can potentially slow down the creation of wealth when they are poorly applied and too voluminous. The wave of deregulation called for by the new President will unleash growth. The economic outperformance of the United States, which has been evident under Biden, is likely to accelerate under Trump.
Although investors have lightened their exposure to technology and AI stocks since the start of the year, the technology sector remains key for Pictet AM. The growing demand for AI is having a major impact on energy demand, a second investment theme highlighted by Pictet AM, that of renewable energy, where falling costs have made it highly competitive. But Pictet AM is also focusing on another, less popular theme: demand for water. AECOM estimates that AI already represents an increase of almost 30% in annual infrastructure spending in the water sector. And according to an article in Nature magazine quoted by Ekopak, AI’s water consumption could reach between 4.2 and 6.6 billion cubic metres by 2027, around half of what the UK consumes each year.
On both sides of the Atlantic, the long-term trend is upwards. Even if the European market has a discount of around 33% compared with the US market, the economic, financial and stock market hegemony of the United States, with its technological dominance, cutting-edge research and innovation, perpetuates a lead over the US market.
From a geopolitical point of view, the great return of the policies of the empires with their spheres of influence (USA, China, Russia) is taking shape, with a three-way world and Europe perceived as the power of the norm being sidelined.
Europe and China
However, a resolution of the Ukrainian conflict during the course of the year will be favourable to the European economies. According to Goldman Sachs estimates, an agreement would result in an improvement of +0.2 to +0.5 percentage points in the European Union’s real GDP and would contribute to a fall of -0.15 to -0.5 percentage points in inflation, partly justified by a fall in energy costs. Christopher Dembik agrees with this scenario, but believes that we need to be very cautious about these estimates at this stage.
China remains mired in deflation, and getting out of it is no easy task. It seems clear that there will be no sufficiently robust consumer stimulus plan in China in the immediate future to break out of deflation. Just look at the 30-year yield in Yuan…lower than the Japanese 30-year yield. The market’s message is clear, and suggests that expectations of accelerating growth in China remain close to rock bottom.
Gold
Finally, with central banks in the driver’s seat, gold remains a buy and a long-short strategy in more volatile and uncertain markets is appropriate, according to Pictet AM.
