Monday Macro – US equities: I was wrong so far

Thinking through the recent US bull rally in equities

A few weeks ago, specifically on June 10th, I declared that I was making a significant shift away from US equities by selling a large portion of high-rated US tech stocks (along with some miscellaneous holdings) and moving into cash (for this portfolio and several others). I did this in the hope of re-entering the market in a few months.

At the time, I wondered whether I was mad to do so, and three weeks later, the verdict must be... YES! The US equity markets have continued to surge ahead. Why have I been so mistaken so far, and what can we learn from this analysis?

Before I begin examining the ongoing dominance of US equity market exceptionalism, let’s first take a temperature check on our current stance. In brief, the global equity markets have ignored their numerous concerns (Iran, Oil, Trade War) and continued to advance. The market has been buoyed by comments from US Secretary of Commerce Howard Lutnick, who reckons that around 10 trade deals had been signed and that discussions with Beijing are advanced on a text that would formalise ongoing compromises. Susannah Streeter, head of money and markets at Hargreaves Lansdown, summarises it well :

“The trade deal announced again between the US and China, has poured more optimism into glass half full attitudes. Even though it’s still pretty scant on detail, the agreement looks set to give US companies better access to crucial rare earth minerals, exported from China. Already data out today shows that the downturn in factory activity in China may be turning a corner. Although official data, from the NBS Manufacturing PMI, showing the sector contracted in May, it was the smallest drop for three months, while new orders grew for the first time since March. Data on the services sector showed growth has returned, helped by more positive vibes on tariff policy. Efforts by authorities to stimulate domestic demand, like lowering borrowing costs, increasing some public sector wages and offering targeted funding for innovation, also appear to be bearing fruit. With the world’s second largest economy showing resilience, it’s likely to keep sentiment more positive at the start of the week.”

For a more forensic examination of returns over the last few months, let’s switch to the table below, which analyses a range of key benchmarks, from the cable rate (USD/GBP) to Bitcoin.

I've ranked returns and colour-coded them for the period since Liberation Day.

The big winner in the nearly two months since that joyous day has been Bitcoin, which is up a stonking 30% with the NASDAQ not far behind. But it’s not all just US equities – the MSCI EM index is up 11.6% since Liberation Day. Over the week, the index rose by 3.19% in USD, with all major emerging markets closing in the green. Korea, Mexico, Taiwan and China advanced by 3.80%, 3.63%, 3.36% and 3.05%, respectively. India and Brazil gained 2.96% and 1.01%.

US equity bulls out in force

Focusing on the US in particular, Wall Street advanced last week, with the S&P 500 up 2.7%, the Nasdaq 3.2% better, and the Russell 2000 2.8% higher. The dollar continued to lose ground against the euro, ending the period at 1.17 (-2.1%).

The Iran-Israel ceasefire sent Brent crude tumbling to pre-conflict levels at $67. As a result, the energy sector lost 2% over the period. By contrast, Tech surged 4% over the week. Chip makers like Nvidia (+6.6%) and Broadcom (+7.8%) continued to ride on AI momentum which shows no sign of slowing. Nvidia is now flirting with the $4, 000bn valuation mark and has unseated Microsoft as the world’s biggest market cap. Healthcare rose,1.2%, financials 3.4% and industry 2.5% over the week, while property shed 1.3%.

If we look at the main benchmark, the S&P 500, is firmly anchored in bull market territory. The chart below shows this benchmark since Covid, with the green line the 20 day moving average, and the blue line the 200 day moving average. The S&P 500 is currently above both the blue and green lines. On this basis the S&P 500 could go much, much higher !

The picture looks a bit different when we view the US equity benchmark through the lens of currencies: as Bloomberg’s John Authors notes, the rest of the world, excluding the US, has been ahead since the start of the year based on common currency terms

UK-based investors should note that any paper gains from the S&P 500's rise will have been partly eroded by a stronger pound, which has been pushing above $1.37.

Switching back again to the US market in dollar terms, the recent rally hasn’t been a concentrated trade i.e its not been just focused on the Mag7. As Author from Bloomberg shows in the following chart, the Mag7 in aggregate have only been keeping pace with the wider market

But what has most certainly been true is that the broader NASDAQ tech index has powered ahead and hit new highs. Gerry Celaya, an excellent technical analyst and strategist for the asset allocation advisory firm Tricio Advisors notes that

“…the sharp rebound (over 34%) from the April ‘US tariff lows) catches the eye…..the shift higher in the NDX is pushing the PE ratio well above 36. This keeps US large-cap shares at ‘rich’ or expensive valuations. Investors who rode out the April collapse may be trimming positions if they feel that that they have been dealt a ‘get out of jail’ card. The long-term channel has the top near 27,000, but the parallel red line is being pressed now and has been difficult to clear on a sustained basis over the last year. “

Chart: NASDAQ 100 makes new high

As for investor sentiment, US investors have become bullish again after a pause in the spring. One of the best measures of this is the AAII Sentiment barometer, which I regularly feature in these letters.

The US private investor organisation says that bullish sentiment (expectations that stock prices will rise over the next six months), increased 1.9 percentage points to 35.1% last week. Bullish sentiment remains below its historical average of 37.5% for the 20th consecutive week and is above 30% for only the 12th time this year. That metric suggests that the current bull sentiment rally could have further to run!

Neutral sentiment, which is the expectation that stock prices will remain essentially unchanged over the next six months, decreased 0.7 percentage points to 24.7%. Neutral sentiment is below its historical average of 31.5% for the 49th time in 51 weeks.

One interesting aside is provided in the graphic below from the AAII, which examines the distribution of bullish sentiment across states in the USA: red indicates bearish sentiment, while green indicates bullish sentiment. It's mostly Democratic states that are bearish, while Republican states seem more bullish, especially Texas.

Reality Check: it's valuations and sentiment, not earnings

We can clearly see that one aspect of this bullish rally is sentiment: investors, especially in Red Republican states, are much more optimistic. There’s also, I would argue, a strong element of ‘buy the dip’ combined with what I have long called the ‘passive accumulation machine’. The 'buy the dip' mentality is quite evident: Trump will secure his deals, everything will be alright, he’ll back down (TACO) from major, aggressive moves, and he’ll pass the Big Beautiful Bill through Congress. Overlaying this is the ongoing tech AI narrative, which shows no signs of fading.

The passive accumulation machine argument is more theoretical but just as important. We live in an ageing world where increasing amounts of money are invested into core, benchmark-focused savings or investment schemes (pensions, ISAs), which are often closely linked to equity indices aligned with specific risk or maturity targets. Some, though not all, of this money flows into index funds or ETFs, which are steadily taking over the active fund management landscape. This money continues to enter markets every month and requires a place to go unless asset allocation managers decide on a structural shift. Looking at the bigger picture, you can see a significant wave of liquidity constantly injecting fresh cash into global allocations that favour the US, partly because its market has performed well and partly because it is highly liquid.

That, in turn, is driving up valuations. Analysts at UK investment bank Panmure Liberum note that since the pause on 9 April, 12-month forward PE ratios have risen by 22% in the S&P 500, 19% in Europe, and 13% in the UK. Meanwhile, the analysts from Panmure Liberum observe, “earnings upgrades have been non-existent in Europe and barely moved in the US, which in any case remains precarious, given the deep economic uncertainty.”

Hold that last thought on earnings– we’ll return to it shortly.

For a sense of how high valuations have become, refer to the table below, which presents the S&P 500 Price-to-Earnings ratio in historical context (the first two numbers are estimates). I think it's fairly difficult to argue against the notion that US equities are quite expensive.

These valuations might be sustainable if corporate earnings in the US were likely to shoot ahead in the next few quarters. But as the latest earnings update from FactSet notes, this is not the case.

• Earnings Growth: For Q2 2025, the estimated (year-over-year) earnings growth rate for the S&P 500 is 5.0%. If 5.0% is the actual growth rate for the quarter, it will mark the lowest earnings growth reported by the index since Q4 2023 (4.0%).

• Earnings Revisions: On March 31, the estimated (year-over-year) earnings growth rate for the S&P 500 for Q2 2025 was 9.4%. All 11 sectors are expected to report lower earnings today (compared to March 31) due to downward revisions to EPS estimates.

• Earnings Guidance: For Q2 2025, 59 S&P 500 companies have issued negative EPS guidance and 51 S&P 500 companies have issued positive EPS guidance.

• Valuation: The forward 12-month P/E ratio for the S&P 500 is 21.9. This P/E ratio is above the 5-year average (19.9) and above the 10-year average (18.4).

What about the great rotation away from the US?

Another big shift that many of us have been pondering (me included) is whether international investors have been shifting their investments out of the US into other geographies. In simple terms, is my selling of US equities part of a broader trend? The hugely significant decision to remove the Section 899 “retaliation tax” clause from the One Big Beautiful Bill Act currently before Congress will be a major relief for asset allocators , but leaves much of the logic for switching out of the US market intact.

Strategists at Morgan Stanley in the US have dug around in the data sets to try and figure out if there’s any evidence this is happening. Their answer? probably not!

“ ….weekly data across global equity ETFs and mutual funds from Lipper show that international investors have been net buyers through the weeks after Liberation Day and most of May, but the pace of buying has slowed year to date versus 2024, although it remains much higher than during the same period in 2021-23. As an aside, the data show that even as foreign investors were adding to US stocks, US investors have been net sellers, suggesting that they are reallocating away from US equities. Treasury TIC data (higher quality but lower frequency) point to something similar – a slowdown in foreign demand, but not significant net selling. Data from Japan’s Ministry of Finance show that Japan net bought more US equities in 2025 than the TIC data suggest.

Regional allocation of global equity funds offers another window into flows. In the aggregate, the weight of US equities in global equity funds' portfolios has dropped roughly in proportion to the increase in the weight of non-US equities. However, this does not equate to net outflows from US equities. It’s worth highlighting that the decline in portfolio weights for US equities has been in line with changes in equity benchmark weights, as the market correction shrank the market cap of US equities as a share of the global equity benchmark index. The lower allocation to US equities simply reflects the fact that the US now represents a slightly smaller portion of the benchmark. Overall, we don’t find much evidence to support the narrative that foreign investors have been reallocating away from US stocks.”

Bottom line? I’m still not tempted to make a dash for US equities again and reinvest. I am more than a little alarmed by soaring valuations, and although I think the AI revolution is only in its early stages, I think investors can’t entirely ignore valuations. I also continue to believe that the bond markets will signal the next major crisis, as they are overwhelmed by ever-increasing short-term US Treasury issuance, which pushes up yields. That might happen at the same time as corporate earnings start to flag in the second half of the year. Nevertheless, I entirely accept that I might be categorically wrong and that the only show in town remains US equities.

And of course, it's always possible that the next big, beautiful deadline date – July 9^th – might come with some nasty surprises. Who knows what will happen on Truth Social!

I’ll finish with one last quote this morning from Bloomberg:

“If I’m honest, I’ve been a little uncomfortable with this rally. There are a number of warning flags that are not yet affecting investor sentiment and that I don’t understand why frankly are not on people’s near-term radars.”

Kate Moore - Chief investment officer, Citi Wealth

Read more from Moore about risks from the stock market rally.