The road ahead for US equities

How might the US election impact small- and mid-cap companies?

Video transcript

2024 has again shown us that anything can happen. In July alone, we experienced the world’s largest computer meltdown, an assassination attempt on Donald Trump and a change of the Democratic Party’s presidential nominee. The historic decision by President Joe Biden to withdraw his re-election bid – the first time a sitting President has done so since Lyndon B Johnson in 1968-has resulted in Vice President Harris as the presumptive nominee for the Democratic Party. Approval polls prior to the change had Trump as the clear favourite, but Harris should not be underestimated, and recent surveys show that that gap has narrowed. The next few weeks will be key for the Democratic Party, which has suffered since the presidential debate in June.

Investors should keep in mind that while politics can cause volatility, this is often short term and importantly, to pardon the pun, the economy trumps politics. Since the Hoover administration, the S&P 500 has delivered an average of 6.2% annualised return in every election year¹. The Russell 2500 doesn’t have data going back to the 1930s, but since its inception in 2003, it has outperformed the S&P 500 in every election year². Ultimately both candidates want a strong economy, and this will benefit US small and mid-cap companies who are the economic backbone of the US.

What are the current tailwinds for US equities?

Video transcript

We believe that the companies that we own, high quality with durable competitive economic moats and sustainable growth, will continue to perform irrespective of who is in the White House. There are a number of tailwinds for the portfolio including onshoring which has been supported by regulation introduced by the Biden administration and likely continued by Harris, but they were initiated by Trump in 2016. We are playing this in the portfolio through our overweight in Industrials, Information Technology and Materials.

With regard to our portfolio, we have not meaningfully altered our positioning following the change to the Democratic ticket. Since the team’s inception, this is their 4^th US election and over that time the strategy has outperformed the benchmark and, importantly, outperformed the benchmark in every calendar year in down markets.³

Elections typically generate a lot of noise; however, it is important to not get too distracted and to remain focused on company fundamentals. We believe that the medium term will be supportive for the types of companies in which the portfolio invests, and we will continue to deliver good risk-adjusted compound returns for our clients and their portfolios.

Investors should keep in mind that while politics can cause volatility, this is often short term and importantly, to pardon the pun, the economy trumps politics.

Is the recent rotation into small- and mid-cap stocks sustainable?

Video transcript

Since the start of July, the moderating inflation print, together with some softening of economic data and more dovish rhetoric from Jerome Powell have led the market to anticipate interest rate cuts once again. This has been supportive to the resurgence of US small-and mid-cap stocks, which tend to be more economically sensitive and reliant on leverage than their larger cap peers.

We believe the ‘broadening out’ trade, with profit taking in the Magnificent Seven being reinvested in a broader section of the market, will continue based on the significant valuation gap that now exists between mega cap companies and their much less expensive smaller cap competitors. The magnitude of this gap (25%+) is rare in an historical context. Changing earning momentum over the coming quarters is likely to lead to a change in market leadership and the winners of the last few years may not prove to be the biggest winners in the market going forward. The run-up of the Magnificent Seven in Q2 2024 seems to be stretched (notwithstanding their solid fundamentals), with these stocks now trading on a blended 41x forward price-to-earnings. This could leave them vulnerable in the second half of the year, absent an acceleration of earnings growth. Conversely, US small-and mid-cap stocks are trading at historic discounts to both large cap and their history, have greater domestic exposure, are typically faster growing and should benefit from increasing levels of M&A over time.

To learn more about US SMID Equity, please click here.

¹ Bloomberg

² Ibid

³ Past performance is not a reliable indicator of future performance. In USD, net of fees.

Our capabilities provide the key.

EOS Stewardship

How might the US election impact small- and mid-cap companies?

What are the current tailwinds for US equities?

Investors should keep in mind that while politics can cause volatility, this is often short term and importantly, to pardon the pun, the economy trumps politics.

Is the recent rotation into small- and mid-cap stocks sustainable?

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The value of investments, and income from them, may go down as well as up, and you may not get back the original amount invested.

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Our capabilities provide the key.

EOS Stewardship

The road ahead for US equities

How might the US election impact small- and mid-cap companies?

What are the current tailwinds for US equities?

Investors should keep in mind that while politics can cause volatility, this is often short term and importantly, to pardon the pun, the economy trumps politics.

Is the recent rotation into small- and mid-cap stocks sustainable?

Related insights

Get the latest insights straight to your inbox

Related Insights

The value of investments, and income from them, may go down as well as up, and you may not get back the original amount invested.

Sustainability. We mean it.

Your preferences

CONNECT

Sustainability.
We mean it.