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The US is expensive. So what?
As the Magnificent Seven keep galloping along – and the rest of the market dawdles in their dust – investors that have ridden them to record highs are starting to wonder just when and how that ride will end.
But while the price of some big tech companies might be stratospheric, it’s important to keep in mind how they got there – and where they could go next.
“Everyone says they’re concerned about valuations,” Jason Todd, CIO of Commonwealth Private, told an MA Financial event last week. “What they’re really concerned about is largely US equities, and what they’re really concerned about within US equities is the Magnificent Seven.”
But in Todd’s view, the US deserves its premium valuation: everybody wants to buy growth, and the US market has it in spades.
“I actually think that there is an incorrect view that you have to worry about concentration in US risks because technology is so large,” Todd said. “I don’t think that’s a reason to be negative. We don’t know how big artificial intelligence and some of these other technological advances are going to be – to think that because they’re a certain size of the market we should be worried isn’t a particularly strong argument.”
But if investors are worried about valuations they don’t have to be defensive; they can buy Europe, the UK or Australia – which are all trading much closer to their averages – and if they’re fretting cyclical risks they can focus on structural investment themes like AI or decarbonisation.
“What you should be considering when you evaluate risks is whether they change the trend of how we think about the macro backdrop or the inflation backdrop or investments in terms of how we want to be positioned,” Todd said.
Meanwhile, Todd believes that value outperformance will remain “modest and short-dated”; investors should be thinking about how to put cash to work by shifting into longer-duration fixed income; and that small caps have valuation appeal but require a strong recovery.
“There is a valuation dispersion between large and small caps and I can’t argue with that, but what I will say is that small caps, value and emerging markets are all the same trade – a value trade, essentially,” Todd said.
