Why are US markets close to record levels when there’s so much uncertainty?
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Why are US equities making new highs when there is so much uncertainty in the world, can you explain what I might be missing please?
Nigel
Russ Mould, AJ Bell Investment Director, says:
The US stock market continues to defy the doubters. After paddling sideways for seven months, the S&P 500 index is brushing aside March’s brief stumble that followed the outbreak of war in the Middle East and moving to new, all-time highs.
For many investors this may seem counter-intuitive, given the uncertain geopolitical backdrop, uncomfortably high oil prices, and the risk of further Presidential policy caprice, but there are reasons for it.
The key now is to stress-test those reasons, check out their durability and reassess the ultimate arbiter of investment return, which is valuation: is the good news already priced in, or not?
Why does the US trade at a premium?
FactSet’s earnings estimates for 2026 put the S&P 500 on a forward price to earnings (PE) ratio of 21 times. This compares to the FTSE 100’s forward rating of 13 times, based on aggregate consensus analysts’ estimates for the UK’s premier stock index.
This may suggest UK stocks offer the better value, but it is easy to argue US why equities might deserve a premium rating.
The US is home to the world’s largest stock and bond markets, and has the deepest pools of venture capital, so entrepreneurs and companies can get ready access to appropriately priced, even cheap, funding for their businesses, especially for innovative technologies.
Regulation tends to have a lighter touch and there is also little, or no stigma attached to either enormous wealth or a business failure, so risk-taking is encouraged, not penalised.
The 401k (employer-sponsored retirement scheme) investing and saving culture is more deeply embedded, thanks in turn to the lesser social security safety net that is available across the Atlantic.
The US is the world’s largest economy, so US firms benefit from operating at scale which generates higher profit margins. US firms are more efficiently run with few staff holidays, and lower rates of unionisation. This frees management teams to focus ruthlessly on quarterly earnings.
Are there any downsides?
None of this is new and there is scope for a political shift to the left owing to the development of, and desire to deal with, powerful quasi-monopolies and wealth inequality.
Presidential interference in the workings of the US Federal Reserve; and the prior rampant debt accumulation could crimp future spending by government and consumers alike, to the detriment of corporate profits.
The 1910s, 1970s and early 2000s respectively offer uncomfortable precedents with episodes of financial market turbulence to show for it.
In this context, it is interesting to note that the S&P 500 stands at a premium to its 10-year average forward PE of 19 times, let alone how the index’s cyclically adjusted price earnings (CAPE) ratio, as devised by Robert Shiller to take a 10-year view adjusted for inflation and interest rates, is about as high as it has ever been.
Why do investors keep buying the dips?
All that said, ‘buying on the dip’ seems to be working for US equities yet again, and there are several cogent explanations for this, too.
The strategy has a good track record that goes all the way back to the Emerging Market debt crisis of 1997-98. If the going gets tough, then investors are accustomed to central banks saving the day with interest rate cuts, bailouts or unorthodox monetary policy.
Conciliatory talks between Washington and Iran have begun, and a ceasefire declared. If this means the risk of escalation is behind us then the next logical steps are de-escalation and then peace, even if the journey may not be a smooth one.
If that is the case, the threat to inflation, growth, government finances, and interest rates from higher oil and gas prices could be more limited than initially feared. Investors can therefore focus on the prospect of interest rate cuts under the chair-elect Kevin Warsh and Republican efforts to boost the US economy in 2027, when the race to the White House in the 2028 Presidential election begins in earnest.
The first-quarter earnings season is off to a strong enough start to justify consensus analysts’ earnings growth forecasts of 19% for 2026 and 16% for 2027 for the S&P 500 overall, to new all-time highs in each year.
Research from FactSet also shows that the technology sector leads the way, with consensus forecasts pointing to 38% earnings growth in 2026 and 25% in 2027, thanks to artificial intelligence.
Finally, research from Goldman Sachs suggests that algorithm-driven traders and hedge funds were short in mid-March and have been caught off guard by the rally, with the result that they have had to cover those positions by buying equities, to create a multi-billion-dollar short squeeze.
A surge in the Most Shorted stocks index backs up the final argument and hints that the US equity rally may be technical, rather than fundamental, in origin.
That in turn suggests the foundations of the rally may not be as strong as they seem, especially as much rests upon AI delivering lofty productivity gains and returns on investment, but the manner in which markets ignored then Federal Reserve chair Alan Greespan’s December 1996 warning of ‘irrational exuberance shows that anything is possible. The technology, media and telecoms bubble did not peak until March 2000, after all.
Russ Mould: Investment Director
Russ Mould is AJ Bell's Investment Director. He has a Master's degree in Modern History from the University of Oxford and more than 30 years' experience of the capital markets.
He started out at Scottish...
