Is now a good time to buy US shares?

The United States stock market dominates the global financial landscape, as does the US economy. The largest US-listed company, Apple, is worth more than the entire UK stock market. But with tech stocks so dominant, is now a good time to buy US shares?

This one country, making up less than 5% of the total global population, accounts for about two thirds of the entire stock market worldwide. The US is the world’s largest economy and arguably its most dynamic.

Many experts believe the question is not whether you should by US shares, but how much should you hold in your portfolio. But are they right?

In this article, we cover:

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Why invest in the United States? 

Despite a slowdown in global growth forecast by the IMF in its latest World Economic Outlook (WEO), the US economy – the largest in the world by GDP – looks robust.

According to the US Treasury, the US outperformed expectations in 2023 along three key lines: “growing economic output, labour market resilience, and slowing inflation.

“The progress we have made on growth, labour markets, and inflation stands out across the globe, and remains an important source of strength for the global economy.”  

A majority of the top global companies were founded in America and remain headquartered there. From tech giants like Apple and Google parent Alphabet, to oil majors like ExxonMobil and Chevron.

The MSCI World index has the US at 69% of the total value of global stock market. This fluctuates a small amount over time but is consistently in the same area.

With this being the case, many experts argue that all investors should have at least some money in US stocks, the only real question is how much. 

The Magnificent Seven

“The US stock market is by far the most influential in the world,” said Laith Khalaf, head of investment analysis at AJ Bell.

“It bounced back from a nasty spell in 2022 with some strong performance this year. Almost all of this can be attributed to the fortunes of a handful of behemoth tech companies.” 

What used to be the FAANGs [Facebook (now Meta), Apple, Amazon, Netflix, Google] have now morphed into the “Magnificent Seven”, namely Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla.

This cluster of huge companies collectively account for over $10 trillion of stock market value.

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Is now a good time to invest in US shares? 

Trying to find the perfect time to invest in any type of asset is very difficult. Called ‘timing the market’, it’s something even the professionals can rarely do perfectly. 

That said, there are some situations that might give you a better chance of seeing profits in the short term than others. For example, buying into the market after a rapid and extended rise in value is generally higher risk than following a sustained period of weaker performance.

While there is sense in “buying the dip” rather than buying into strong rallies, nothing is guaranteed, and a market that has fallen a lot can always fall further. 

The safest approach is to drip-feed your money into the market on a weekly or monthly basis rather than putting in large amounts in one lump, and be prepared to hold on for years. We have more on this if you are new to investing.

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What about volatility in the markets?

“When it comes to investing in volatile asset classes like equities, your time horizon is incredibly important. It is more so than trying to second guess whether it is the right time to invest,” said Jason Hollands, managing director at Evelyn Partners.

“You should only invest in any equity market if you expect to remain committed for several years.”

Hollands noted that the US is home to more world-class companies than any other equity market and its dominance of the MSCI World index reflects that.

“In fact, the largest US-listed company, Apple, valued at $2.7 trillion, is worth more than the entire UK stock market. US equities undoubtedly deserve a place in almost all portfolios,” Hollands continued.

He added that he is a little cautious for US equities in the short-term, as the outlook is finely balanced. 

On the one hand, higher borrowing costs will impact companies looking to refinance and squeeze consumers. He believe there is still potential for a mild recession, which isn’t really reflected in current share price valuations. 

“That said, earnings have proved to be remarkably resilient, with many businesses able to pass on cost increases to their customers thanks to a tight labour market.

“In fact, next year, earnings growth of around 11% is expected. Another factor is that we may yet see another leg up in the AI-driven rally.”    

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Are the valuations of US shares too high?

Company valuations can give an idea on whether shares are relatively expensive or cheap, but it is not a perfect science.

Valuations are expressed as a multiple of a company’s earnings. Most commonly this is calculated by dividing a company’s share price by its earnings per share.

Many experts consider the price of the tech stocks to be particularly expensive relative to their earnings. The other side of the argument is that their current earnings do not reflect their true value given their potential for higher earnings in the future. 

“The latest results from these companies have been a bit of a mixed bag, but the growth they have delivered over the last ten years is undeniable,” Khalaf said. 

“The challenge is that the stock market is forward-looking, and the stock prices of these tech titans are so highly valued that there is little room for error.

“Their influence on the US and global stock market as a whole is so big that this has to be a concern, as any disappointment in earnings could be ruthlessly punished.” 

“On the flip side of the coin, these companies are deeply entrenched in today’s digital economy, and command so many resources that they can crush or buy any competition. Some are in pole position to capitalise on the profits that might be generated from artificial intelligence,” Khalaf continued.

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Should I move out of the US stock market?

With the US being such a large part of the global market it is rarely a wise move to abandon US stocks completely.

Even if prices are down you will still probably be collecting dividends on many stocks if you stay invested. While the past is no guarantee of what will happen in the future, the US stock market has – so far – always recovered from crashes within a few years.

Being able to sell your holding just before a big fall and then buy in again at a lower price is the dream move, but very few people can pull this off. If you time a sell-off badly, the market could move up without you on board.

Trimming the amount of any asset type you hold from time to time can be prudent though.

“Investors do need to consider how much exposure they might already have to the US stock market, as it makes up a large part of any global funds they might hold,”  Khalaf said.

“US equities have long commanded premium valuations. This is in part because the market has a strong bias towards fast-growth sectors like technology and communications services,” Jason Hollands, of Evelyn Partners, added.

“But even in the same sectors, US companies do tend to be more highly valued than their peers in the UK and Europe. This is why some formerly UK listed companies have upped sticks and moved their listings to the US.

“Even bearing the above in mind, current US equity valuations are quite elevated in parts of the market compared to the past.”

Read more: How to invest in the S&P 500

Are there still good opportunities to be found in the US stock market?

“If you are relatively defensive towards the near-term outlook, as we are, then sectors we like are healthcare and consumer staples,” Hollands said.

“But artificial intelligence (AI) is undoubtedly going to have a transformational effect over the coming years. There are plenty of US stocks that are well positioned to benefit, including chip designers, software companies, and online retailers.”

Hollands noted that most UK based investors get their exposure to North America by investing in US or global equity funds, rather than directly buying individual shares. 

A popular route is by investing in a very low-cost S&P 500 index tracker, he noted. This has served investors well in recent years due to their high exposure to the mega-cap tech and online giants like 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 a retail investor seeking to invest in US shares, your best option is likely to be one of the major online investment platforms. 

For those with a relatively large amount of money – hundreds of thousands or more – you should consider seeking out the services of a financial adviser or wealth manager. 

If you are managing your own money then you have three main options

The first option is for you to buy a tracker fund which gives you exposure to an entire index, such as the S&P 500 or Nasdaq 100.

You will do as well as the market, no better or worse. Over long multi-year timeframes you are highly likely to be in a good amount of profit if taking this approach.  

Your second option is to buy an actively managed fund. A portfolio manager will select a group of US stocks for you that they believe will outperform the broader market.

It should be noted that it is rare for an actively managed US equities fund to outperform and S&P 500 tracker consistently. 

The third way is for you to go is to buy individual company shares. Most UK investment platforms allow you to buy US stocks in a very similar way to UK shares.

There is one additional hurdle; you will need to fill out a W-8BEN form. This is a declaration that you are not a US resident for tax purposes, and can therefore pay a reduced rate on dividends for UK citizens of 15%. If you were American, you would have to pay 30%.

You should only attempt to buy individual stocks if you have an advance understanding of the markets and have carried out appropriate research. 

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Is the US dollar a good investment?

Speculating on currencies is seldom a wise move. While the US dollar is entrenched as the world’s reserve and is the most important currency to global markets, it is not immune from fluctuations in value. These are hard to predict accurately.

As an investor it is impossible for you to avoid some exposure to US dollar movements because company earnings are often logged in dollars. But it is unlikely to make sense to add to this risk through direct exposure to the US dollar itself.

The supply of US dollars can be radically increased at any time by the Federal Reserve, thereby reducing its value. This occurred following the 2008 global financial crisis and during the Covid pandemic.

“While the exchange rate between sterling and the dollar does matter to returns harvested from the US stock market for UK investors, currency movements are highly capricious. They can’t be forecast with any degree of accuracy,” Khalaf noted.

Hollands said dollar strengthening was a major theme for most of 2022. For UK based investors the gains on the currency helped cover much of the underlying losses on US shares that year.

Last Autumn this pattern went in the opposite direction as the pound recovered from its lows. But since the summer the Dollar has rebounded again, he added.

“Currency markets are notoriously volatile and hard to predict. But my expectation is that with US rates now likely to have peaked, there is no particularly convincing reason why the dollar should rally hard from here. 

“However, a lot will depend on whether the US economy dips into a mild recession or manages a soft landing. If expectations of a recession grow, then rates could be cut sooner than expected which would like to see the dollar soften.”

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