Multi-Asset Blog

Is the Time Still Right for Multi-Asset Investing in the US?

30 April 2024

4 min read

Karen Watkin, CFA| Portfolio Manager—Multi-Asset Solutions

Edward Williams| Investment Strategist—Multi-Asset Solutions

We think US capital markets still offer plenty of potential for investors—especially those with the ability to reach across asset classes.

With the S&P 500 reaching all-time highs, investors may question whether it’s time to rotate away from the US in favor of other opportunities. Risks are certainly on the horizon for US capital markets, but we think they still hold attractive investment potential—especially for investors with a flexible, adaptive multi-asset approach.

The US led a world economy that surprised to the upside in 2023. While global momentum is likely to slow in 2024, we expect the gap between the US and its developed-market peers to last—with the US having the best chances for a soft landing.

Despite equity valuations that look expensive in certain areas, we see lasting growth potential, given secular trends likely to favor US firms in the years ahead. And with unrivaled depth and breadth of assets, US markets offer investors return potential and outlets for diversification to help manage risk.

Let’s take a closer look at the key risks on investors’ minds and why we believe the US is well positioned to navigate potential bumps in the road.

Is Technology Overdone? Not If Earnings Have a Say

It’s easy to see why investors are concerned that the tech rally may be long in the tooth. For years, tech helped catapult US markets, most recently thanks to a handful of elite highfliers. The so-called Magnificent Seven accounted for 58% of the S&P 500’s returns in 2023 alone. Their momentum has spilled over into 2024, but we think investors should consider waiting before heading for the off-ramp.

Valuations of these mega-cap tech names may look expensive in absolute terms, but they appear less stretched versus their own history, given their impressive earnings performances. In fact, the ratio of 12-month price to forward earnings of the Mag Seven versus the broader market is well below its five-year average (Display).

Magnificent Seven Valuations Look Less Stretched Due to Strong Earnings

Profits for the universe of S&P 500 firms haven’t been as far removed from the Mag 7 in the last 2 years.

For illustrative purposes only. Past performance does not guarantee future results.
Display compares 12-month forward P/E of the Bloomberg Magnificent Seven Index and the Bloomberg US Large Cap ex Magnificent Seven Index.
Through April 17, 2024
Source: Bloomberg and AllianceBernstein (AB)

Earnings within the Mag Seven are also much less uniform than investors may assume, driving some performance dispersion so far this year. For instance, fourth-quarter earnings softened for Tesla after it reported big drops in deliveries, while NVIDIA’s earnings powered past expectations, thanks to booming demand for artificial intelligence (AI)–related equipment and services. AI is still on the rise, but selectivity is warranted in identifying opportunities as the market starts to demand fundamental performance to justify richer valuations.

There’s also potential beyond these highfliers in the broader equity market, where earnings are expected to carry more weight as the economy moderates. Better earnings growth has driven consistent US equity outperformance for some time (Display). We expect this storyline to continue, since firms that generate persistently profitable growth are likely to be the bright spots in an environment of more subdued returns.

US Companies’ Stronger Earnings Have Driven Their Outperformance

US company earnings have clearly led those in Europe and global ex-US firms over the last decade.

For illustrative purposes only. Past performance does not guarantee future results.
US represented by S&P 500 Index, World ex US represented by MSCI World ex USA Index, Europe represented by MSCI Europe Index.
Through April 17, 2024
Source: Bloomberg, MSCI, S&P and AB

If Inflation Is Sticky, Pricing Power Could Be the Difference

After peaking in 2022, inflation steadily declined through 2023 until progress slowed in early 2024. These near-term spikes are likely to delay the Federal Reserve’s cutting cycle, extending the “higher for longer” backdrop through the year.

While these stickier prints during the first few months of the year have been a source of uncertainty for markets, we believe investors should focus on the longer-term trajectory—which is downward. We do expect uneven progress to continue, which should support risk assets, including stocks. We think it’s prudent to lean toward profitable companies with strong pricing power—those able to pass inflationary pressures on to customers. We consider this attribute another indicator of quality that may boost some firms if inflation remains stubborn.

An Eventual Soft Landing: Good for Equities and Bonds

So far this year, US fixed-income markets have been painfully surrendering to a higher-for-longer reality. Treasury yields have reversed all of December’s moves and then some, as investors extend their timetables for eventual monetary easing.

Still, we believe the US economy can still stick a soft landing, which should support equity markets. The outlook for bonds is also bright. Yields are attractive, and once the Fed starts to ease and rates fall, bonds with more duration (interest-rate sensitivity) should fare well. They might also cushion against potential geopolitical shocks if regional tensions escalate.

Meanwhile, adding higher-yielding credit may provide attractive carry and added income alongside equities in a moderate-growth environment. Although credit spreads on US corporate bonds seem to be at the lower end of historical ranges, we still see compelling all-in yields. Also, issuers are increasingly backed by solid fundamentals: underlying quality has been gradually improving since the COVID-19 pandemic, thanks to better earnings, healthy balance sheets and the pandemic-induced default cycle that weeded out some weaker parts of the market.

US Elections: Anxiety High, Likely Market Impact Low

Investors might be feeling better about the economic outlook, but in many cases their concerns are shifting to potential fallout from the upcoming US elections. It’s natural to want to brace for the impact of a potentially divisive election cycle on markets, but our research suggests that the election reality has been less dramatic.

Equity returns during election years have typically been in line with historical averages (Display, left), although near-term volatility does tend to rise (Display, right), reinforcing the need to take an active approach that seeks sources of diversification.

Stocks Have Historically Performed Fine in Election Years, While Risks Rise

Since 1928, equities returned 11% on average in US election years, but volume and volatility have been higher.

For illustrative purposes only. Past performance does not guarantee future results.
As of April 17, 2024
Source: Bank of America US Equity and Quant Strategy, Bloomberg and AB

From a big-picture perspective, the US led the global economy to an upside surprise in 2023, and we think its time is far from up. Growth is moderating, but the US should prove more resilient than its developed-market peers as the dust settles. With a changeable macro picture, we believe a flexible multi-asset approach spanning asset classes may be well suited: focusing on secular growers with good profitability on the equity side, and combining that with attractive carry and diversification from bonds to cushion against possibly higher volatility.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

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