With the U.S. heading to the polls in just a few weeks, we invited three industry experts to discuss equity investing in stock markets from across the pond. We were joined by Cormac Weldon from Artemis, Mary Jane McQuillen from ClearBridge Investments and John O’Shea from Loomis, Sayles & Company. They explored the overall health of the U.S. economy, why now is the time for the active investor and looking beyond the Magnificent Seven, amongst many other topics.

Key takeaways

• The impact of election outcomes: The presidential election brings with it a number of uncertainties, so it’s crucial, in the run-up, to focus on factors that are likely to remain stable.
• The resilience of the U.S. economy: The U.S. economy has demonstrated resilience, despite the interest rate hikes of the last two years.
• Active investing in a changing market: Against a higher interest rate backdrop, there’s a stronger case for active investing, particularly in small-cap sectors where market inefficiency presents significant investment opportunities.

The presidential election

In advance of the closely run election, it’s prudent to focus on factors likely to remain stable, regardless of the outcome. One example is infrastructure investment, which both parties support. Furthermore, fiscal spending looks set to be significant regardless of who wins, though the impact on taxes will depend on the election’s results. For instance, a Democratic sweep could raise taxes, but that result seems unlikely.

In fact, the more likely outcomes of the upcoming election are a Republican sweep or a Harris presidency with a divided government, which influences legislative capabilities as well as the economy. Key areas affected by the results include tax policy, regulation, trade, and fiscal policy, with federal agency appointments also having the potential to impact markets.

Finally, any unilateral presidential action in regulation and trade may not always affect markets as predicted. Past performance shows that regulatory environments don’t always align with market performance.

Against this backdrop, and while price volatility may arise from short-term investor shifts, focusing on quality businesses and maintaining a long-term perspective can yield positive results.

The overall health of the U.S. economy

The U.S. economy has shown resilience, as it continued to grow despite significant interest rate hikes aimed at curbing inflation. The economy has remained robust, partly because many homeowners are insulated from rate increases due to long-term fixed mortgages.

While inflation has squeezed lower-income consumers, and sectors like healthcare and semiconductors are still recovering from pandemic disruptions, improvements are evident.

In fact, recent data revisions show stronger-than-expected consumer and corporate health. The September jobs report was positive, with unemployment and job creation stabilising. U.S. consumer spending, which drives a large portion of GDP, remains solid, with personal incomes continuing to grow. Additionally, an unexpected Chinese policy shift has benefited multiple industries. With GDP growth last quarter and the Federal Reserve likely to cut rates, economic growth is expected to accelerate in the near term.

Looking beyond the Magnificent Seven

While (arguably) the "Magnificent Seven" stocks are well placed for future growth, beyond these companies, AI presents exciting opportunities, particularly in healthcare. AI has the potential to revolutionise diagnostics and surgery, improving efficiency and reducing costs in areas like managed care and drug discovery. A good use case of AI is how it is utilised in mammography imaging to assist in identifying breast cancer lesions.

In addition to healthcare, there is significant AI-driven growth in companies such as Accenture, focusing on AI training and consulting, and Adobe, which enhances video and graphic production through AI.

Across the board, whether a Magnificent Seven stock or not, responsible practices are a key consideration when investing in AI. For instance, the high energy consumption associated with AI technologies is a challenge. It’s important, then, to see companies conduct forward planning. A good example is Amazon which is collecting vast amounts of data to evaluate their customer base and power usage. Furthermore, stewardship collaborations with firms like Google and Microsoft can be an effective way of ensuring that AI development aligns with sustainability goals, particularly in clean energy use.

Broadening out from mega caps

Recently, fears of a recession shifted to concerns about excessive growth, highlighting the mixed economic landscape. Evaluating businesses beyond growth or value labels is imperative therefore, where identifying companies with strong fundamentals and favourable risk-reward profiles is key. For instance, Nvidia and various home delivery firms have thrived due to their improving fundamentals. Looking to the future, many sectors should continue to transition from negative to positive earnings, indicating fundamental recovery, which is essential for attracting investors.

Active investing in an era of higher inflation and interest rates

Zero interest rates created a low hurdle for companies, allowing even poorly managed firms to survive. For instance, around 30-35% of Russell 2000 companies are loss-making but remain operational due to lack of competition.

Now, with government expenditure and recent high inflation indicating that interest rates will stay higher for longer, there will be a cost of capital that impacts weaker business models lacking competitive advantages. This environment is evolving into a differentiated and stock-picker’s market, where selective investment can add significant value. The small-cap sector, in particular, presents opportunities due to its inefficiency and lack of research coverage

from analysts, allowing investors to uncover potential value in mid- and small-cap organisations.

Active sustainable investing

There’s reason for optimism about long-term, active investing, particularly when sustainability is integrated into research. Companies continue to show enthusiasm for ESG (Environmental, Social, and Governance) principles, regardless of growing anti-ESG sentiments in the media.

Despite challenges in the responsible investing space, the core values of diversity, long-term climate goals, and disciplined capital allocation remain paramount. Many investors and companies are still dedicated to generating free cash flow and making smart capital deployment decisions, even in the face of external pressures.

In fact, ESG can be seen as a competitive advantage, which is why it is so key to build ESG analysis into research. As client demand for sustainable practices increases, businesses recognise that adopting these strategies not only helps meet expectations, but also drives long-term cost efficiencies and adds value.

Outlook for 2025

The US market is an exciting prospect for active managers for the next decade and beyond. Investment opportunities abound, particularly among highly profitable growth companies. For instance, U.S. firms like Microsoft and semiconductor companies are trading at discounts compared to their European counterparts, signalling unique value in the market.

However, inflation could pose a significant risk. While the market currently anticipates falling rates, a surprise increase in inflation could disrupt the positive outlook. Other key risks could stem from unpredictable events, so maintaining a diversified revenue stream and investing in strong, quality companies is crucial.

On a positive note, inflation has decreased, allowing for potential rate cuts. If, or when, they materialise, they would benefit sectors like small caps. High-quality, sustainable companies in diversified portfolios are also well-positioned for growth, especially in a rate-cutting environment. Overall, identifying resilient firms that can capitalise on changing market conditions is vital.