The S&P 500 has now recovered its losses this year and US equities have once again started to outperform their European counterparts. Do investors who rushed to sell the US now have egg on their faces?
The blue-chip US index is (just) back in positive territory for 2025, helped by this week’s agreement between the US and China to scale back reciprocal tariffs during a 90-day period of further negotiations. While the Stoxx 600 index is up 7 per cent so far this year by comparison, the US rebound (from a year-to-date loss of 15 per cent as of early April) does indicate that predictions of a cataclysmic and even permanent fall from favour for US stocks were wide of the mark.
While a big dose of uncertainty remains regarding how the trade war will ultimately play out, it remains the case that this uncertainty presents solid opportunities as well as risks. As recent movements show, we were correct to advise not to haphazardly sell off US investments amid nervy markets.
Even so, some analysts take the view that medium-term prospects still look better for European markets. Strategists at Deutsche Bank recommend underweighting US equities but to take a neutral position on the Magnificent Seven, the collection of tech and AI giants that includes companies such as Meta (US:META) and Nvidia (US:NVDA).
There is a valuation opportunity here, given the Magnificent Six (excluding Tesla) is trading at its lowest level against the wider US market since 2017.
Deutsche Bank expects US equities to outperform in the short term, but points to a wide range of issues – the domestic impact of tariffs, political uncertainty, earnings momentum, valuations, fiscal policy, interest rates and the outcome of a potential Russia-Ukraine ceasefire – as factors that support a comparatively brighter picture for European markets.
On the other hand, Bank of America remains negative on European equities. Its analysts argued that there is “scope for disappointment” with current share prices. Their base case is for 10 per cent downside for the Stoxx 600 (and weakness for cyclicals against defensives) despite easing trade tensions.
In the current context, our asset allocation models have shed their holdings in short-dated Treasury Inflation-protected securities in favour of domestic gilt safety. However, they have maintained significant positions (of at least a quarter) across our risk buckets in the MSCI World index, of which the US market makes up more than 70 per cent.
For those currently looking at options on the London market, Robin Hardy’s latest equities analysis examined the prospects for online trading provider IG Group (IGG) and facilities management business Mears Group (MER).
Meanwhile, at a sectoral level our latest momentum screens highlighted earnings growth momentum at aerospace and defence stocks in both the US and UK, from Rolls-Royce (RR) and Babcock International (BAB) to Howmet Aerospace (US:HWM).
Upcoming sector catalysts include the UK strategic defence review, which is expected to be released shortly. It’s worth noting that Serco (SRP), where defence now delivers over 40 per cent of revenue, announced a £1bn Royal Navy contract win this week.
Our US momentum screen also highlighted the rapid growth available at data analytics and defence sector challenger Palantir Technologies (US:PLTR). However, as its extortionate valuation of 185 times forward earnings indicates, growth prospects must be balanced against rich ratings.
There’s a wider point to consider here about the price of the US market: the S&P 500 trades on 21 times forward earnings against 15 times for the Stoxx 600.