It’s been a tumultuous time for world economies and markets, and that’s especially true for the US. Geopolitical tension, record-breaking interest rate increases, recession risk, ground-breaking tech developments, a banking crisis and government debt drama are all plates Uncle Sam has had to spin.
But what’s next for the world’s biggest market, and what are the catalysts for change that investors need to be aware of?
This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.
Will the AI rally keep running?
Surprise, surprise, we need to talk about artificial intelligence (AI).
The supercharged march of AI has sparked a rally in the US companies that make important components for AI tech. Things like chip makers and certain software are all under the spotlight.
Chip specialist NVIDIA has just seen its valuation smash through the $1trn barrier. Fewer than ten companies in the world have ever crossed this sky-high threshold.
But what does all this excitement tell us about what could be next?
Investors can often lose focus on what happens after everyone’s had their slice of cake. High excitement leads to lower inhibitions and higher-risk decision making. We’re not saying we think a crash is likely or imminent, but very full valuations are more sensitive to ups and downs.
It's an important time for investors to understand the difference between the exchanges in the US. The Nasdaq, for example, is home to many tech companies. That means it’s likely to be more exposed than the main US stock market to dramatic swings in the coming months.
Investing in AI – how will artificial intelligence shape our future?
Looking longer term, we share the view that AI tech will disrupt lots of different industries. Everything from farming to logistics will need to adapt, and with big change comes big opportunities. But we don’t think we’re going to see change at a pace that upends the investment case of industry stalwarts just yet. That means market movements could remain relatively tempered in the broad scheme of things.
What will be important is understanding how companies you’re invested in might be exposed to the world of fast-changing tech and what this could mean for their performance.
3 artificial intelligence share ideas
The land of the free and home of… sticky inflation?
US inflation is running at 4.9%, above the target of 2%. While there’s been progress in bringing prices down, core inflation, which strips out more volatile energy and food prices, is proving especially stubborn.
Looking to the future, we think the Federal Reserve (Fed) is less likely to cut interest rates as quickly as previously thought. That increases the risk of recession, because higher interest rates take the heat out of economies by making it more expensive to borrow and more rewarding to save.
A combination of slower growth in consumer prices and some economic wobbles have led some investors to assume that the Fed will cut interest rates more aggressively than expected. The truth is, the biggest concern for policy makers is bringing core inflation down, which means they aren’t following the same map as previous economic episodes.
Ultimately, we see a higher chance of negative market reactions in the short to medium term. Uncertainty is the name of the game these days. And that makes the US and global markets more susceptible to movement.
Should investors care who the next president is?
The US carries political risk. That means investors will be affected by the ongoing candidate battles in the run-up to next year’s election. Policies in the US have ramifications across global markets.
If the public feel a divisive or unreliable leader is on course to get the top job, it can send jitters through share prices. Markets don’t like surprises and if the oval office is occupied by someone whose next move is hard to read, it can make for shaky ground.
Issues like anti-trust and competition rules are very political, and certain candidates will be more likely to focus on this than others. A more left-wing president could be more likely to have big tech under a microscope, increasing the likelihood of fines or making large acquisitions more difficult.
At the same time, other extremes can see regulation relaxed too far, which can create issues. The regional banking crisis has been made worse by the weaker state of some banks’ balance sheets, after President Trump dialled back regulatory capital requirements.
Other political issues like infrastructure, tech and public spending will affect listed companies. A big dial-back in government spending will make for tougher times for exposed businesses. And the opposite is true.
The run-up to election season is likely to create short-term waves in the US market. But this is part and parcel of the political cycle. Investors should remember to focus on companies that are capable of surviving periods of uncertainty. And if you own shares that are especially sensitive to government policies, now might be a good time to understand what next year’s election might mean for you.
Which areas should investors watch?
It’s always important to hold a diverse basket of investments – don’t rely on one type of asset, region or sector. But one particular area of the market we think holds potential is software.
Just as the march of AI has seen chipmakers’ valuations soar, the same could happen to some software providers. The hardware sold by chipmakers often goes to software providers, who tend to have very attractive business models and fatter margins.
We think investors should pay attention to companies offering software as a service (SaaS). Some big US names in this space have more compelling valuations than certain AI options.
As ever, nothing is risk free, and broader market uncertainty can’t rule out the risks of ups and downs.
Looking for opportunity? – Leave it to an expert fund manager
Ziad Gergi, HL US Fund Manager
The US economy is proving to be resilient in the face of the multiple rate hikes.
Having said that, there’s a clear divergence between the new economy that’s proving to benefit from continued innovation like generative AI, albeit at higher valuation multiples, and the manufacturing sector that’s showing signs of slowdown.
The next few months will be interesting as the Fed, and the market, will closely monitor the incoming economic data to assess the next monetary policy move and the impact on investors’ positioning.
The HL US Fund is run by our sister company Hargreaves Lansdown Fund Managers Ltd.
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