Are US stocks too expensive? On many valuation metrics, yes. The S&P 500 has climbed from a low of 683 on March 6 2009 to a whopping 2,439 today – far surpassing the pre-recession high of 1,562. This year alone the index has risen 8%, pushed higher in particular by tech stocks. Technology stocks’ rise has also boosted the NASDAQ index, up 14.7% year to date.
Many asset managers – including Henderson’s Luke Newman just this week – have called the top of the US stock market, compelling investors to take gains and reallocate to more attractively valued regions, such as Europe or emerging markets.
Garry White, chief market commentator at Charles Stanley, and his peers remain happy investors in US equities. They believe the US equities rally is not over yet and tech stocks are not expensive.
“The tax and infrastructure plans that have not been implemented yet by President Trump – we do not think that they are reflected in valuation in the market. So these are additional positives that would be come through with the current US stock rally,” said White.
While some consider there to be doubts over whether Trump will be able to follow through on his promises for tax cuts and fiscal stimulus, White and his colleague John Redwood, a chief market strategist, are confident that the corporate tax cut policy will be delivered. This is because Paul D. Ryan, the speaker in the House of Representatives, shares a similar view to Trump regarding corporate tax cuts.
“Paul Ryan is a soul mate to Trump when it comes to tax reform in the US. Paul Ryan is a politician who has made a career out of arguing America has a totally uncompetitive corporate tax system and this must be reformed that rates need to be brought down massively. Ryan was speaking yesterday sounding confident that there will be a tax build in autumn and they aimed to wrap it all up by the end of the year,” said Redwood.
He believes once the corporate tax cut implemented, which see a cut from 35% to possibly 15%, it will drive money sitting offshore accumulated by US multinational companies back to the US. This in turn will benefit local projects.
“The tax cut is a really big thing as the market really loves them. Apple (AAPL), for example, has billions of money all around the world. And if they manage to get their back to the US under the tax cut, they may invest in manufacturing in the US, but a lot of them are likely to end up being in share buybacks. So that is also positive to the valuation of these technology companies,” said White.
“The fundamental strength we are looking at; when these tax cut reform coming through they are going to be positive to the US economy and consumers as well as that will bring more money into their pockets. We are bullish on the US economy.”
“There will be awful a lot of cash to inject to lead to higher investment spending. The market is very excited about this,” Redwood added.
President Donald Trump inherited a strong US economy, and policies Trump planned to do will benefit the economy in the future, Redwood believed. He thinks President Trump’s policies will reflate the US economy one way or another.
“He will not reflate the economy as much as he wants, but he will reflate it a bit more than the market thinks he will. We think that underpin a strong economic case in the US. We don’t think it is the end of the cycle, we don’t think the US central bank will ruin the party by sticking up interest rates too much. We remain happy investors in the US,” said Redwood.
Tech Stocks in the US
Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN) and Facebook (FB) are the five most valuable firms in the world – and their market values are now bigger than the FTSE 100 index. While these tech stocks are rallying this year, White believes they are not expensive in terms of value. Morningstar analysts consider them to be trading at fair value.
“They are very innovative is really good at the moment. They come up a long way. You have to buy America if you love technology; there is not much market around the world providing that kind of exposure,” said White.
Apart from the tax cut policy, the team believes Trump’s change of attitude towards China is also a positive move for technology companies, which support the growth potential of tech stocks.
“Technology companies rely on Chinese supply chains significantly. Having a war with China would really hit the technology industry, but it does not like to happen now,” said White.
