For a decade now, US equities have been the undisputed champions of global stock markets, delivering exceptional returns for investors. The past two years specifically have been particularly strong, driven by the relentless rise of the Magnificent Seven which powered the S&P 500 to new highs.
But how long can this rally really last? Or, have we passed the peak?
Arguably, there are already growing signs that suggest US equities are beginning to lose their leadership position. Investors have started to question the lofty valuations the Magnificent Seven have reached, causing concern over a potential bubble. Even Warren Buffet, one of the world’s most famous investors, is reducing his exposure to US names.
With that in mind, we question if now is the right time to look elsewhere?
Key takeaways
- Investing in assets with expensive valuations is always a risk, leaving investors vulnerable to price corrections.
- Market leaders never lead markets forever.
- Periods of outperformance have historically always been followed by challenging periods.
The risk of investing in expensive markets
US equity valuations are currently at historic highs - which usually would be warmly welcomed by investors. However, while soaring stock prices bring undeniable gains, they also come with heightened risks. Elevated valuations leave investors increasingly exposed to concentration risk and price corrections. In fact, buying or holding on to expensive assets, rather than seeking undervalued opportunities, can be a perilous strategy to follow.
Timing the market to exit positions at the optimum moment, to then pivot into cheaper stocks, has always been exceptionally tricky. Market turning points are, frustratingly, often only too obvious in hindsight and even then, many investors may still be in denial about a downturn. Hence the adage, time in the market, not timing the market.
Looking back with hindsight does have its advantages though, with history offering valuable lessons. Historical market analysis highlights that any periods of prolonged outperformance are typically followed by challenging times for investors. Both the dot.com bubble and Japan’s 1980’s boom serve as stark reminders.
Looking back also demonstrates that market leaders never stay market leaders forever - even if that can seem unimaginable at the time. When it comes to US equities today, despite so many years of dominance, their strength will likely not continue indefinitely, especially as cracks are already beginning to show in their performance. For instance, the Magnificent Seven’s valuations have reached such dizzying heights, but when coupled with competitive threats, particularly in AI with the Chinese disruptor DeepSeek, is a cause of concern.
At the same time, market breadth is also widening, with other sectors and regions starting to attract capital in a way that has not been seen for many years. Investors are beginning to rotate into sectors like financials, healthcare and international equities - all signals of changing investor sentiment.
The current risk of US investments
Other factors from the US backdrop also reinforce the attractiveness of looking elsewhere for investment opportunities. Beyond valuation concerns, the US market is facing rising geopolitical and economic uncertainty.
Despite Trump’s return to the White House ultimately looking supportive for US equities, the second-time President sparks concern over his policy stance on trade tariffs, immigration and fiscal spending - all of which could fuel inflationary pressures. His unpredictable approach may also trigger market volatility - something investors never like to see.
Exacerbating these concerns is the extreme concentration of the US equity market - the Magnificent Seven account for an eye watering portion of the S&P 500. With such a high level of concentration comes vulnerability and risk. If any one of these names falter, a disproportionate impact on the broader index would follow and, as a result, investors would be negatively affected.
Why we’re looking beyond the US
While US equities have had an undeniably good run, valuations, sentiment and a bumpy political backdrop suggest an increasing risk ahead. With historical patterns indicating that market leaders rotate, now may be the time to broaden out into other markets where more compelling opportunities lie. Diversifying into undervalued, high-quality investments could be a key way to navigate through any volatility as and when a rotation occurs.
At Square Mile, we have long advocated a diversified, long-term approach. By maintaining a balanced stance in our portfolios, we ensure that we always have exposure to high-quality equities from all around the globe.
But we also constantly look to invest in bonds as well. Currently, there are many attractive opportunities in fixed income with government bond yields in the mid-4% range, and investment grade corporate bonds offering 5% yields.
Therefore, both offer attractive coupons in addition to the potential for capital appreciation if global economies weaken and central banks further lower interest rates. Our bond exposure is primarily through strategic bond funds, which are agile enough to position portfolios based on where the most opportunities lie. This will help dampen future volatility, which is likely to be a feature of markets with Trump in power.
We also make use of alternative strategies to further diversify our funds with limited correlation to traditional stock and bond markets, which helps us mitigate an ever-changing investment backdrop.
Doing so will be of the utmost importance over the next market cycle. As uncertainty looms over US equities, employing a flexible, diversified approach will be essential to remain prepared to take advantage of the compelling opportunities ahead.
Mark, Chris, Dan, Matt, Scott and Florrie
Square Mile Investment Management Team