US shares boom driven by tech giants, but others may now fire

Booming US shares have put billions of dollars into investors’ pockets, and there are divided views about how long it can last.

The global gorilla of investment markets, the US, is muscling up more than ever, and investors worried about rising talk of a bubble are being urged to look beyond its booming tech giants.

US stocks today make up more than two-thirds of global sharemarket capitalisation, much larger than their country’s share of global GDP, but investment specialists say not everything appears overvalued.

Many of the so-called magnificent seven – Apple, Amazon, Microsoft, Alphabet (Google), Meta, Nvidia and Tesla – have been justifying their sky-high share prices by beating profit expectations.

Schroders Australia head of multi-asset Sebastian Mullins said the global outlook was turning more positive because of the US.

The Schroders economics team in London had lifted its forecast for US growth this year from 1.3 to 2.7 per cent, Mr Mullins told a recent investment briefing.

Life’s been a party for Wall Street traders. Picture: Angela Weiss/AFP

He said the speculative IPOs that flooded the market a few years ago were nowhere to be seen now – there were 1000 in 2021 but only 150 last year.

“You are seeing profitable tech do well.

“Everyone was saying last year that all the expected earnings for this year were just crazy. They have beaten expectations again. Calling them a bubble is premature – they’re companies that are doing very, very well.”

Even if the magnificent seven stocks were flat or fell, the US economic outlook justified the potential for the other 493 companies on the S&P 500 index to play catch up, Mr Mullins said.

“Those companies do look relatively cheap to their history,” he said.

However, his colleague Martin Conlon, Schroders head of Australian Equities, said “overall valuations are pretty challenging”.

Mr Conlon said it was “alarming” that the US was now 70 per cent of the market cap of the world.

“And within that, 30-40 per cent is within tech and communications, and the US is only about 18 per cent of global GDP,” he said.

“There’s a big presumption that the profit growth of those big technology companies is going to keep on growing and be durable forever.”

Apple’s recent $3.3bn fine in Europe for anti-competitive behaviour challenged assumptions that the tech giants’ global monopolies would last forever, Mr Conlon said.

“Our job is supposed to be to value companies, not to just ride themes.

“I am a believer that AI is going to do a lot of wonderful stuff … but profit projections are probably running ahead of what I think is most likely to happen.”

AXA Investment Management Core chief investment officer Chris Iggo said US equity price-to-earnings ratios were at two-year highs, there were risks to current valuations, and “not much is cheap”.

“However, performance is being driven by a strong economy, a lack of any evidence of significant credit problems, healthy balance sheets and corporate profitability,” he said.

“Earnings are expected to grow in 2024 as US GDP growth continues to defy previous expectations.”

Mr Iggo said risks included sticky inflation, slower economic growth, uncertainty around the US election and commercial property worries.

“For now, they are not material enough to reverse positive momentum in markets,” he said.

“There is no recession, rates will probably come down in the second half of the year and companies are doing very well. Any setback in markets should potentially be seen as an opportunity to invest – buy on dips.”

EAM Investors CEO Travis Prentice said many companies would benefit from AI’s expansion.

“Given the level of change currently, it is nearly impossible to predict the future with any degree of certainty,” he said.

“Therefore, when selecting investment strategies, one should always pay attention to the level of flexibility inherent in any strategy. Rigidity is aligned with death.”

Originally published as US shares boom driven by tech giants, but others may now fire