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The American stock market accounts for two-thirds of the world market by value, making it the most important market in the world.
Apple, Nvidia, Google, Amazon, Tesla, Microsoft, etc. are based in the US, as are many other well-known companies.
Most investors have exposure to U.S. stocks through individual companies, index trackers, or actively managed funds.
This article covers:
Read more: Is now a good time to buy UK shares?
Why invest in the US?
The U.S. economy has slowed slightly this year, but still looks strong. The US central bank, the Federal Reserve, appears to have suppressed inflation without doing much damage. At least so far.
Many of the world’s top companies were founded in the United States and are still headquartered here. From tech giants like Apple and Google’s parent company Alphabet to oil majors like ExxonMobil and Chevron.
In the MSCI World Index, the US accounts for 69% of the total global stock market. This varies slightly over time, but is consistently in the same region.
Given this situation, many experts argue that all investors should have at least some money in U.S. stocks. The only real question is the amount.
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Magnificent Seven
“The U.S. stock market is the most influential in the world,” said Rais Khalaf, head of investment analysis at AJ Bell.
“They bounced back from the woes of 2022 and delivered strong results in 2023 and 2024. Almost all of this can be attributed to the good fortune of a handful of large technology companies.”
What was once the FAANG (Facebook (now Meta), Apple, Amazon, Netflix, Google) has morphed into the “Magnificent Seven” of Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla. .
Together, this group of giant companies accounts for more than $10 trillion in stock market value.
Read more: What is money and what do banks do with your money?
Is now a good time to invest in US stocks?
Finding the best time to invest in any type of asset can be very difficult. This is called “timing the market,” and even experts can rarely do it perfectly.
That being said, there are some situations where you are more likely to benefit in the short term than others. For example, buying into a market after a rapid and prolonged increase in value is generally riskier than following a period of poor performance.
As of September 2024, the US market is near all-time highs, which is generally not considered a good entry point. However, we don’t know if prices will return to reality anytime soon.
It makes sense to wait for a “buy on the edge” rather than riding a strong rally, but nothing is guaranteed and a market that has fallen significantly can fall further at any time. Also, a major drop may not occur for many years.
The safest approach is to drip money into the market on a weekly or monthly basis, rather than putting in large amounts at once, and be prepared to hold it for years. This is called dollar-cost averaging, or if you’re British, pound-cost averaging. For those new to investing, we’ll explain this in more detail.
Read more: When will interest rates fall? How will my investments be affected?
What about market volatility?
“When investing in a volatile asset class such as stocks, time horizon is very important. That’s more important than trying to second-guess whether it’s the right time to invest,” Managing Director of Evelyn Partners , said Jason Hollands.
“You should only invest in the stock market if you expect it to last for several years.”
Hollands noted that the United States is home to more world-class companies than any other stock market, and the United States’ dominance in the MSCI World Index reflects that.
“In fact, Apple, the largest publicly traded company in the US, is worth $3.3 trillion, making it worth more than the entire UK stock market. US stocks definitely deserve a place in almost every portfolio,” Hollands said. said.
He added that he is somewhat cautious on U.S. stocks in the short term because the outlook is delicately balanced.
On the other hand, rising borrowing costs will affect businesses looking to refinance, putting pressure on consumers.
“However, the tight labor market has allowed many companies to pass higher costs on to customers, and revenues have proven surprisingly resilient.”
Read more: What does rising UK interest rates mean for you?
Are U.S. stocks valued too high?
Corporate valuation can tell you whether a stock is relatively overvalued or undervalued, but it’s not a perfect science.
Valuation is expressed as a multiple of company earnings. Most commonly, this is calculated by dividing a company’s stock price by its earnings per share.
Many experts believe that tech stocks are particularly expensive relative to their earnings. The other side of the argument is that current earnings don’t reflect true value, given the potential for future earnings.
“The challenge is that the stock market is forward-looking and the stocks of these tech giants are so highly valued that there is little room for error,” Khalaf said.
“This should be a concern because their influence over the U.S. and global stock markets as a whole is so great that any disappointing performance could be brutally punished.”
“On the other side of the coin, these companies are deeply embedded in today’s digital economy and control so many resources that they can outcompete or acquire any competition. We are in a pole position to take advantage of the profits that may be generated,” Khalaf said.
Read more: How to invest to beat inflation
Should we exit the US stock market?
The United States accounts for a large portion of the world market, so abandoning U.S. stocks completely is rarely a wise move.
Even if the price goes down, you can probably receive dividends on many stocks if you keep investing. Although the past is no guarantee of what will happen in the future, the U.S. stock market has historically always recovered from crashes within a few years.
Being able to sell your holdings right before a big drop and buy them back again at a lower price is a dream move, but very few people are able to pull it off. If you sell at the wrong time, the market can rise without you getting on board.
However, reducing the amount of asset types you own may be wise in some cases.
“Investors need to consider how much exposure they already have to the U.S. stock market, as it accounts for the majority of the global funds they may hold,” Calaf said. he said.
“U.S. stocks have long had expensive valuations, in part because the market is heavily biased toward fast-growth sectors such as technology and communications services,” Hollands said.
“However, even in the same sector, US companies tend to be valued more highly than their UK or European peers. This has led to some companies previously listed in the UK taking the plunge and listing in the US. That’s why I moved it.
“Even with all that in mind, current U.S. stock valuations are significantly higher in some parts of the market than they have been in the past,” he added.
Read more: How to invest in the S&P 500
Are there still good opportunities in the US stock market?
“If you’re relatively defensive about the near-term outlook, as we are, the sectors we like are health care and consumer staples,” Hollands said.
“However, there is no doubt that artificial intelligence (AI) will have a transformative impact in the coming years. There are many U.S. stocks that are well-positioned to benefit, including chip designers, software companies, and online retailers.” .”
Hollands noted that most UK-based investors gain exposure to North America by investing in US or global equity funds, rather than buying individual stocks directly.
A popular method is to invest in a very low-cost S&P 500 index tracker. This has been good for investors in recent years due to its high exposure to mega-tech and online giants such as Apple, Microsoft, Alphabet, and Meta.
Read more: How do interest rates affect inflation?
How can I invest in US stocks from the UK?
If you are an individual investor looking to invest in US stocks, your best option is probably one of the leading online investment platforms.
People with relatively large amounts of money (several hundred thousand or more) should consider seeking the services of a financial advisor or wealth manager.
If you’re managing your own money, you have three main options
The first option is to purchase a tracker fund that gives you exposure to an entire index such as the S&P 500 or Nasdaq 100.
For better or worse, things will work out just like the market. Over a long, multi-year period, this approach is likely to yield significant benefits.
The second option is to purchase an actively managed fund. A portfolio manager selects a group of U.S. stocks that it believes will outperform the market as a whole.
Note that actively managed US stock funds rarely consistently outperform S&P 500 trackers.
The third method is to buy shares in individual companies. Most UK investment platforms allow you to buy US shares in a very similar way to UK shares.
There’s one more hurdle. You must complete the W-8BEN form. This is a declaration that you can pay a reduced dividend rate of 15% to UK nationals because you are not US resident for tax purposes. If you are American, you have to pay 30%.
Only attempt to buy individual stocks if you understand the market beforehand and have done proper research.
Read more: What inflation means for your money
Is the US dollar a good investment?
Currency speculation is rarely a wise move. Although the US dollar is established as the world’s foreign exchange reserve and is the most important currency for global markets, it is not immune to fluctuations in value. These are difficult to predict accurately.
Corporate earnings are often recorded in dollars, so it’s impossible for investors to avoid being influenced to some degree by movements in the U.S. dollar. However, increasing this risk through direct exposure to the US dollar itself is unlikely to make sense.
The supply of U.S. dollars can be significantly increased by the Federal Reserve at any time, thereby reducing the value of the U.S. dollar. This happened after the 2008 global financial crisis and during the coronavirus pandemic.
“For UK investors, the pound-to-dollar exchange rate is important to the returns they receive from the US stock market, but currency movements are highly volatile and cannot be predicted with any precision,” Khalaf said. .
Holland said a strong dollar will be the main theme for much of 2022. For UK-based investors, the currency’s strength helped cover much of the potential losses in US stocks that year.
In autumn 2023, this pattern reversed as the pound recovered from its lows. However, since summer 2024, the dollar has rebounded again, he added.
“Currency markets are notoriously volatile and difficult to predict. However, my prediction is that US interest rates are likely to have peaked now, giving the dollar a special case for a strong rally from here.” There is no reason why there is.
“But a lot depends on whether the U.S. economy slips into a mild recession or a soft landing. If recession expectations increase, interest rates could be cut sooner than expected, and perhaps The dollar will weaken.”
Read more: How to invest £10,000
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