What’s next for US equities?

For centuries a mysterious object has crossed the skies, greeted as a dark omen. With each appearance, Halley’s Comet has fired the imagination of pessimists and prophets of doom. In 1066 it was embroidered into the Bayeux Tapestry as a divine sign of upheavals destined to change the course of English history; in 1456 Pope Callixtus III ordered special prayers against its supposed threat during the Ottoman siege of Belgrade; in 1910 panic spread across Europe when newspapers claimed its tail would poison the air. And yet each time the comet faded away in silence, without the long-awaited catastrophe ever coming to pass.

The anxiety stirred by its appearance recalls, in some ways, the apprehension with which investors have watched US equity markets in recent years. Analysts and market participants keep their focus on the United States to see whether – and when – the growth dynamic that, barring a few stumbles, has been powering global markets for several years will slow. Stretched valuations, debt, tariffs, politics, tech bubbles: all these factors are constantly under scrutiny. And yet, like Halley’s Comet, US markets have repeatedly defied forecasts, continuing to follow their own orbit and pulling global equity growth along with them.

Of course, markets do not obey the eternal laws that govern the motion of the stars; by nature, they remain cyclical. A careful assessment of risk factors is therefore always necessary as investments can fall in value as well as rise and there is no guarantee that past resilience will be repeated. Even in 2025, despite a year of growth, doubts about US assets remained central to the debate with the announcement of new tariffs by US President Donald Trump and concern about an expansion driven by a few large names and largely linked to investment in Artificial Intelligence (AI).

In the first half of the year, the dollar touched a three-year low and US equities underperformed international peers, before the rebound that lifted valuations again. However, even with risks on the horizon – and given that market performance can never be predicted with certainty – the outlook for US equities today appears better than a few months ago.

The tariff shock and the market’s response

Let’s start with tariffs, which generated volatility in the first part of the year and uncertainty over the evolution of US trade policy. This acts as a brake on equity performance: companies suffer short-term repercussions along their value chains, increasing perceived risk.

During Trump’s first term, amid tensions between the United States and China, markets suffered – but only temporarily. The S&P 500, for example, lost about 4.4% in 2018 at the height of the turbulence, then jumped by more than 31% in 2019 after the trade deal. In other words, tariff-driven losses were quickly absorbed, suggesting that investors interpreted them more as cyclical shocks than genuine regime shifts.

Current circumstances show some differences. Although markets are aware of the White House’s deliberately changeable strategy, they initially sensed a more structural shift. Even so, the dynamic now driving equity indices doesn’t look very different from the past, with markets retracing even faster than in 2018, despite a somewhat less clear backdrop. This doesn’t mean that a tougher trade stance has no consequences: at a macro level, tariffs effectively act as a tax on consumers and businesses. But recent experience shows that, at the levels proposed, trade barriers have not altered the underlying trajectory of markets. That said, future tariffs could have a more lasting impact, and investors should remember that short-term rebounds in the past do not mean similar outcomes will occur in future.

It should also be noted that tariffs are often aimed at strategic sectors, with the goal of strengthening self-sufficiency and encouraging domestic production of key goods. Although the scope of new measures remains uncertain, a sustained focus on boosting US domestic production is likely. Similar onshoring trends could emerge in other regions, mitigating the more structural effects of protectionist policies.

Naturally, the process creates complexity and volatility, and new rounds of tariffs could continue to weigh in the months ahead. Companies need time to reorganise, and the long-term fallout remains to be assessed. But investors seem to have learned to respond to announcements with greater caution, looking more to hard economic data than to political rhetoric. In addition, a diversified approach remains a useful tool to soften sector- or region-specific risks and to limit the more lasting effects of a tighter trade policy.

Concentration risk

Another theme that dominated 2025 is the excessive concentration of US equity indices. After a difficult start to the year, technology and growth stocks (companies with fast-rising revenues and profits and higher valuations) took back the reins of the market. Tech was the best-performing sector in the S&P 500 in the second quarter, while the Magnificent Seven (Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia and Tesla) staged a strong recovery from their April lows.

This trend has supported markets, but has also reignited long-standing fears that the rebound is being driven by too few companies – and perhaps by excessive enthusiasm for the AI revolution – raising doubts about how solid the rally is beneath the surface.

These concerns are understandable: when concentration is excessive, especially around firms in the same sector, investor expectations risk becoming distorted. There is also a greater risk that a sharp decline in one or more mega-caps – triggered by company-specific factors such as regulation, competition or corporate setbacks – could spill over to the entire index. While these firms remain profitable and influential, heavy concentration in a few technology companies means that any setback – whether from regulation, competition or broader market sentiment – could weigh heavily on index performance.

Paradoxically, however, this vulnerability also demonstrates the strength and resilience of the US innovation ecosystem, and it is one reason why we believe US indices continue to surprise. These groups have the scale and capability to dominate in areas such as AI, cloud, e-commerce and social media –sectors shaped by network effects and dynamics in which a few players capture most of the market. They generate huge cash flows and boast strong balance sheets, making them more defensive during economic slowdowns. All this strengthens the argument that elevated P/E multiples – the ratio of a company’s share price to its earnings – can be at least partly justified by solid fundamentals.

The big tech companies increasingly behave like conglomerates, with dozens of business lines often built through acquisitions. It is estimated that the Magnificent Seven have acquired more than 800 companies, expanding their presence across a wide range of sectors. In practice, it is hard to find a household or business that does not use more than one product or service from these groups every day. It is also striking how, over the past year, corporate spending on technologies related to Artificial Intelligence has become the main engine of growth.

According to some analyses, investment in information-processing equipment and software – used as a proxy for corporate investment in AI – contributed more than consumption to GDP growth in 2023–2024, even though household demand remains the traditional backbone of the US economy.

These investments are starting to have direct effects on macro data as well. The Bureau of Economic Analysis (BEA) revised second-quarter 2025 GDP growth up from 3.0% to 3.3%, thanks mainly to spending on intellectual property, machinery and real estate that is closely tied to the AI boom. This shows that the technology is increasingly supporting both corporate earnings and overall growth, helping to make the high valuations of the tech giants more sustainable.

How long can US equities stay expensive?

It isn’t just optimism about AI’s future that underpins the positive view of the US market. In the second quarter, results were solid for US companies: roughly 81% beat earnings-per-share (EPS) expectations and 69% beat on revenues, both above historical averages. Even if some of this earnings growth reflects cost-cutting and headcount reductions, it is certainly good news for investors.

Aggregate profit growth year-on-year was 12.6%, versus initial estimates of about 5% at the end of June, signalling a quarter in which results decisively topped expectations. Revenue growth was 6.3%, up from an initial forecast of around 4%.

The Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) stood out in particular: 100% of them beat EPS forecasts, with average aggregate earnings growth of 26.6% – more than double the index average. Most reassuring are the earnings outlooks: after second-quarter results, growth expectations for US companies have risen again, widening the gap with Europe.

Thanks to stronger earnings growth, relative valuations for US equities look less “over-priced” today than at the peaks of 2024, while still more expensive than their European counterparts. Although earnings have been strong, high valuations leave US equities vulnerable to sudden corrections, particularly if growth expectations are not met.

On the macro front, the Federal Reserve (Fed) cut interest rates by 0.25% (in line with broad expectations), aiming to support a US labour market that has started to show signs of weakness. At the same time, the Fed revised up its growth estimates for 2025 to 1.6%, while for 2026 US economic growth is forecast at 1.8%. The US economy, in short, appears to be moving towards a phase of normalisation. Still, economic forecasts are inherently uncertain and can change quickly in response to domestic or global shocks. Investors should be cautious about relying on projections.

In conclusion, the US market remains supported by solid earnings and favourable prospects, particularly in the technology sector. Although uncertainties persist and no one can predict markets with absolute certainty, structural trends continue to provide robust fundamentals for US companies, confirming this asset class – and this economy – as a cornerstone of global portfolios.

So, despite high valuations and the ever-present spectre of political or economic shocks, the stars of the US economy continue to shine, undimmed by the comet’s glare.

Invest in US shares with Moneyfarm

Ready to tap the US market? US equities can offer exposure to some of the world’s most innovative companies, while also coming with risks such as higher valuations, potential volatility and sensitivity to economic or political events. 

With Moneyfarm DIY Investing you can do it via your Stocks & Shares ISA or GIA – simple pricing, integrated analytics, hassle-free tax admin (we handle the W-8BEN; inside an ISA your returns are tax-free), transparent GBP↔USD conversion, and everything in one place (shares, ETFs and managed funds). Or go curated with our Special Collections – Tech Titans, The AI Revolution, California Dreaming, Electric Mobility, and Latest IPOs – designed, managed and monitored by our Asset Allocation team to help you explore opportunities with confidence. But remember that themed investments are more concentrated and may carry higher risk than a diversified portfolio.

Important Information: The value of investments can go down as well as up, and you may get back less than you invest. Past performance is not a reliable indicator of future results. Thematic investments (such as technology or AI-focused portfolios) may be more volatile and concentrated than a diversified portfolio. Returns from US investments may be affected by currency fluctuations. Nothing in this article should be taken as investment advice or a personal recommendation. Any views expressed are for information only and may change without notice. Tax treatment depends on your individual circumstances and may change in future. If you are unsure about the suitability of an investment, please seek independent financial advice.