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Tariffs

US Share Prices Stage a Rebound Amid Trade Deal with China, but Investors Remain Skeptical

Strategic Insights

— 2 min read

As the S&P 500 index recovers from its losses since the start of the year, many investors are questioning the stability of the US market and the country's role as a safe haven for investments. The recent trade deal with China has provided a temporary boost, but experts warn that the underlying issues of de-globalization and rising trade tensions could lead to a return of market volatility in the coming months.

Key Takeaways:

  • The US equity market's dominance in global indices has encouraged flows into the US dollar, with the dollar being at its strongest versus other currencies since 1985 by January this year.
  • Foreign portfolio holdings of US securities have risen by $10.3tn since June 2024, with a phenomenal change in share holdings making up over $8tn of this increase.
  • About 50% of global savings held abroad by investors are currently invested in US assets, which could lead to net capital outflows from the US and into other markets.
  • US inflation remains moderate, but any poor economic data combined with a return of trade disputes could bring market volatility.
  • The US Federal Reserve is unlikely to cut interest rates, despite above-target inflation, while investors remain cautious about US Treasury bond holdings.
  • The least price-sensitive holders of US Treasuries have reduced their exposure in recent years, from 47% to around 36% of all US debt since 2012.
  • US earnings estimates have not been reduced significantly, despite some investors expecting a change in US growth prospects.
  • European equities may be rerated against the US, with a 45% discount on valuation now down to 30-35%, and shares in European banks remaining cheap.
  • Some portfolio managers have shifted their views, with Bank of America's fund manager survey showing investors are more overweight in Eurozone equities compared to the US than at any time since October 2017.

Statistics:

  • The S&P 500 index has recovered from its losses since the start of the year, with the US market trading at 27 times forward earnings by February 2025.
  • Foreign portfolio holdings of US securities have risen by $10.3tn since June 2024.
  • About 50% of global savings held abroad by investors are currently invested in US assets.
  • US inflation remains moderate, at just above 2% annually.
  • The dollar was at its strongest versus other currencies since 1985 by January this year.
  • European equities are trading at a 30-35% discount to the US, down from a 45% discount.

Sources:

  • The Federal Reserve: data series on foreign portfolio holdings of US securities.
  • MSCI: data on global indices and US equity market valuation.
  • US Treasury: data on foreign portfolio holdings of US securities.
  • JPMorgan Asset Management: data on least price-sensitive holders of US Treasuries.
  • Bank of America: fund manager survey data.
  • Wellington Management: macro strategist data.
  • Allspring Global Investments: global macro strategy data.
  • BlackRock: Emea chief investment officer for fundamental equities data.
  • Columbia Threadneedle: equity specialists data.

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