By Aviva Investors

From Wall Street and Silicon Valley to Main Street, the US is a well-diversified and innovative economy that has long-rewarded patient investors. 

But remember, your investments can fall as well as rise and you can get back less than invested.

What to expect from US equities

There is no doubt that the US is an economic powerhouse. As the largest economy globally according to the World Bank , it is also highly diversified, offering a very large opportunity set for investors. While we may immediately think of companies that are household names like Microsoft, Disney and Amazon, there are thousands of other profitable listed US companies providing the products and services that we use either directly or indirectly in our daily lives. 

It’s also a truly innovative economy. The US is home to some of the world’s largest companies in industries such as banking, pharmaceuticals, software, and heavy equipment. Incremental innovation in these industries over time has given American companies a competitive edge leading to strong margins and consistent earnings profiles.

In other areas of the market, that innovation has been more disruptive to existing business models. Silicon Valley has produced several new product categories that did not even exist a decade ago – think electric vehicle manufacturer, Tesla; ride-hailing app, Uber; and even plant protein-based producer, Beyond Meat. Backed by strong consumer demand and increasing R&D spend, we expect more of this sort of innovation in the years to come.

Finally, US President, Joe Biden, has signalled his commitment to green recovery efforts. It is reasonable to expect both a green policy shift and sustainability-focused infrastructure spending will be important investment drivers over the next few years. 

How have US equities performed?

The S&P 500 is a stock market index that tracks the largest listed companies in the US; many investors use this as a proxy for the performance of the US market. Despite some notable wobbles, such as during the Global Financial Crisis, the index has provided investors with a solid long-term return profile.  But it is important to understand that past performance is not a guide to future performance. 

One of the defining features of the past few years has been the divergence between cheaper ‘value’ names and expensive ‘growth’ names. Mega-cap (the largest companies in the investment world) technology names – often referred to as the FAANGs (Facebook, Amazon, Apple, Netflix, and Google) – which offer high relative levels of revenue and earnings growth have driven markets higher. 

When the COVID-19 pandemic hit in 2020, the market’s preference for ‘stay-at-home’ winners further exacerbated this performance differential. Lockdowns had a dramatic effect on the domestic economy with airlines, energy, and bricks-and-mortar retail all significantly lagging. Lower interest rate expectations also held back the performance of financials relative to the tech-orientated leaders.

Should you consider US equities?

Given the overall importance of the US economy within the global economy, it makes sense to consider allocating to US equities. It’s important to look beyond the headlines to the much deeper opportunity set. 

While the US equity market direction is heavily driven by quarterly earnings results, finding a fund manager who is good at looking beyond the short-term market noise is important. Understanding business models, integrated supply chains, changing consumer preferences, and navigating the political landscape are important considerations.

How could you use a US equity fund?

One of the most common mistakes that investors make is trying to predict which investment style will outperform in the future. Ideally, finding a core fund or mix of funds that give you broad exposure to the vast opportunity set (Large-Cap, shares of large companies, to Small-Cap, shares of smaller companies; Growth stocks, those expected to increase their earnings faster than the rest of the market, to Value stocks, those that appear to be priced lower than they should be) is probably a good fit for an investor who wants to take that guess work out of the equation.

Research US Equities

Check out our Experts’ Shortlist for a list of US Equity funds selected by the Manager Research team at Aviva Investors. Or use our search tool to look at all available funds.