Rethinking US market strategies

The bounce back in US assets has surprised even the most bullish investors. The S&P 500 has jumped over 7% in a month and is now above its post-election highs*. Yet, the problems haven’t gone away: the pause on reciprocal tariffs is due to expire on 8th July, attempts to rein in the deficit have been largely unsuccessful. The US is still facing a crippling debt burden, higher inflation (from tariffs) and slower growth. Share prices appear, at best, optimistic.

The temptation for investors is to conclude that it’s all fine; they can happily stick with the technology-heavy trackers and growth funds that have served them so well over recent years. However, we would suggest that a more diversified approach to the US stock market is likely to serve investors better over the long term, and may even help them avoid some of the volatility associated with a resumption of the tariff wars.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

It is difficult to find areas within the US stock market that aren’t very expensive. Many of its most expensive areas are also those that look most vulnerable to tariffs – the technology sector with its long supply chains, for example. Even outside the highly-rated technology sector, US stocks look expensive relative to their equivalents in other countries and to their own historical valuations.

However, one happier hunting ground might be the small and mid-cap areas. These were seen to be one of the likely beneficiaries of a Trump presidency. Domestic businesses should benefit from the re-shoring ‘Made in America’ drive of the new US administration, while also getting a boost from domestic tax cuts and lower regulation.

After an initial rally, the sector has been lacklustre as it became clear that Trump’s priorities were elsewhere. However, with the launch of the ‘One Big Beautiful Bill’, tax cuts and lower regulation may be back on the table again. The bill is seen as good for corporate America, making permanent the tax breaks in the 2017 Tax Cuts and Jobs Act. Businesses will be able to deduct the cost of building new manufacturing facilities from their taxes as the administration tries to incentivise domestic production.

In response, the National Federation of Independent Businesses said: “After months of debate, Congress is on the doorstep of historic legislation that would provide permanent tax relief for 33 million small businesses. By making the 20% Small Business Deduction permanent, the One Big Beautiful Bill Act will free small businesses to invest in their businesses and employees – benefiting communities all over America.” 

And here’s the kicker: US smaller companies are cheaper than their large-cap counterparts. Historically, they have tended to be more expensive, because they tend to have faster growth rates, but the focus on the S&P 500 - and the mega-cap technology stocks in particular – has seen US smaller companies overlooked.

Cormac Weldon, manager of the Artemis US Smaller Companies fund, says: “The deregulation theme has taken a back seat since the trade tariffs were announced, although we have seen significant defunding of government agencies. Longer term, as we work through the tariff chaos, we still believe cutting red tape will be very positive for US companies, in particular smaller companies.”

The team’s view is that the policies within the Bill have the advantage of being a narrower tax giveaway, but encouraging domestic investment in production. “This is precisely the sort of policy we envisioned at the outset of this administration, as it will boost US investment, strengthen domestic companies and lead to increased high-value-added jobs in research and development, among other benefits. We are also encouraged that the administration is attempting a joined-up policy using both carrot and stick to encourage domestic investment.

The Premier Miton US Opportunities fund also has a high weighting in small and mid-cap US equities, though is multi-cap in its approach. Manager Hugh Grieves says that although Trump’s tariff policies are causing disruption in the short term, “once these uncertainties clear and economic confidence returns, we expect companies and investors can then look forward to benefits from future deregulation and possible tax cuts. We believe this should particularly favour more domestically-focused small and mid-sized companies which the fund is concentrated on.”

Another area worth looking at is dividend strategies. These have a natural valuation discipline and therefore also avoid many of the higher valued parts of the US market. Stuart Rhodes, manager of the M&G North American Dividend fund, makes the case for this type of investment approach: “Dividends provide certainty in a world of uncertainty and the compounding effect of re-investing rising distributions has delivered compelling total returns over the long term through a combination of income growth and capital growth.”

His approach has a natural valuation discipline, saying “valuation and fundamentals remain the key determinants of our decision making.” More recently, this has seen him move away from more highly valued areas, and into high-quality defensive companies where valuations are more compelling. His top 10 holdings include companies such as Mastercard, JPMorgan and Broadcom**. Dividend growth is a priority for Rhodes, which should see him gravitate to companies with stable and predictable cash flows and sound long-term growth prospects.

Another option in this area is the JPM US Equity Income fund. This has a high weighting in financials, while technology is under 10% of the overall fund assets***. Its top holdings include Wells Fargo, Bank of America and Charles Schwab***. This makes it another good option to diversify away from S&P 500 trackers or growth-focused US exposure.

The US economy and stock market have proved resilient through the recent turmoil and are likely to remain so. However, it makes sense to diversify away from the areas that are most vulnerable to further tariff disruption – either because it impacts their business, or because of high valuations. Small-cap and dividend focused US funds could offer a sensible starting point for such diversification.

*Source: MarketWatch, S&P 500 Index, at 3 July 2025
**Source: fund factsheet, 30 April 2025
***Source: fund factsheet, 31 May 2025

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.