However, tailwinds remain. Strong economic growth has driven corporate earnings, while US companies have enjoyed significantly lower tax burdens than elsewhere, owing to President Trump’s tax cuts last year. And although the culture of stock buybacks is not unique to the US, companies there have embraced this policy much more than in other developed markets – so long as funding costs remain low and companies are reluctant to spend their cash on capital expenditure, continued stock buybacks will also serve to support US equities.
We believe the main driver of this rally has been the shift in tone from the Federal Reserve, who announced in March that they would not raise rates this year – and markets are actually pricing in a rate cut before year end. It’s worth bearing in mind that if the US economy is slowing enough to justify rate cuts, this is not necessarily good news for equities and corporate earnings. However, if the Fed is perceived to have engineered a ‘soft landing’, then US equities may well resume their uptrend.
US politics are also influencing equity market performance. With President Trump seemingly obsessed with stock market levels, the US government will certainly try to engineer strength here through policy actions and language, mindful of the upcoming election in November 2020.
What is the deal with trade?
There has been a recent air of complacency around the US-China trade talks, with the positive weekly soundbites from the US trade delegation enough to keep investors convinced that everything was on track.
But the current escalation in tensions, at a time when everyone seemed to think that a deal was imminent, has clearly wrong-footed many investors – though for now the pain is being felt more in Chinese and Asian equities than in the US.
Despite a tough week, US equities are still close to record highs. However, it is worth bearing in mind that, once again, US indices have been led higher by a small number of tech stocks. The assumption that these names can grow in perpetuity may be called into question at some point.
Where are better alternatives for investors?
Given the equity market rally we have seen so far this year, as well as increasing trade and geopolitical concerns, there are compelling reasons to take some profits.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.