US stock market today and looking ahead to 2023

Global stock markets had a difficult first half of 2022 and the US was no exception. It was also caught up in the weakness of the technology sector, which forms a significant part of the S&P 500. However, a strong Dollar has taken up the slack for international investors, meaning UK investors have continued to do well from their investments in the US. Will the US stock market continue to outpace its rivals in 2023?

Part of the perennial dilemma for investors is that the US almost always looks more expensive than its peers, but equally tends to outpace them. This has happened in most market conditions, with many investors apparently considering US stocks defensive and high growth at the same time.

The average performance in 2021 for a fund in the IA North America sector was 25.5%, ahead of any other market except India and a long way ahead of other developed markets such as Europe and the UK. This year – and in spite of the rout in technology stocks – the average fund was down 6.6% to mid-October, still ahead of the majority of other developed markets.

The low interest rates in place since the Global Financial Crisis favoured assets with predictable, long-term cash flows. The technology sector was a significant beneficiary, with Alphabet, Meta and Amazon all fulfilling that criterion – growing at 20-30% with a predictable growth pathway ahead. Between them, the technology giants form around 30% of the S&P 500.

The technology sector has sold off since the start of the year, quite dramatically in some instances. The Meta share price, for example, fell by over 60% between the start of 2022 and mid-October. Some of the largest technology companies haven’t been as affected – Apple and Microsoft, for example, have proved more defensive than higher growth technology stocks.

Other factors aside, the US market has continued to deliver relatively strong returns for international investors as a result of the strong Dollar.

Even with the recent rout, technology dominates the S&P 500. However, the US market is the largest and deepest in the world and there is plenty of choice for investors. The Dow Jones, for example, looks very different, with a far greater focus on the country’s industrial, healthcare and financial giants. In general, active managers focusing on income will also have far less in the technology sector. The S&P Dividend Aristocrats, for example, has just 5% in technology, with its highest weighting in consumer staples and industrials.

There is little doubt that investors will be buying into the US market when it has had an exceptionally strong run of performance. The S&P 500 was trading at around 20x earnings to the end of September, compared to around 13x for the FTSE 100 or just 11.7x for the FTSE Small Cap ex Investment Companies. The recent weakness of the technology sector has brought these relative valuations down a little, but not significantly.

Equally, the US Dollar looks expensive on most measures. Goldman Sachs recently said the dollar’s rise is in its “later innings,” as it nears extreme levels against currencies like the Japanese yen or the British pound. There are many reasons this could continue. The US Dollar is usually considered a ‘safe haven’ currency and the Federal Reserve continues to raise rates aggressively, which should also support the currency. Equally, investors may continue to decide that the US stock market is a safer home for their investments than the UK or Europe, where economic growth is weaker and structural problems look more entrenched.

The Biden administration has already pushed through much of his legislative agenda, securing capital for infrastructure development, green energy transition and improvement in utilities. As such, any redrawing of the Senate and Congress may not be quite as important as it would have been, but it could mean progress stalls over the next few years.

The Presidential election in 2024 may prove more of a lightning rod, however. There is considerable doubt over the succession planning for Biden and whether the divisive Donald Trump will run again.  

How much of a risk is this for the US stock market and/or the economy? The outcome of the elections can hit some politically charged sectors, such as healthcare. Biden’s team has allocated significantly more to healthcare spending in his Inflation Reduction Bill, but this could evaporate under a Republican administration. Similarly, the commitments to green energy development may weaken.

That said, the US is a dynamic economy and has shown itself capable of significant reinvention. Its strength from here may not come from the technology giants, particularly social media companies that are facing considerable regulatory problems. As such, index investing may not prove as successful an approach as it has in recent years. Nevertheless, the US market is full of innovative, fast growth businesses with exposure to the largest consumer market in the world. Investors can’t bet against it.

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