The pioneering spirit that drove the pilgrims over the Atlantic is still very much in evidence in the US stock market. This month has seen the SpaceX IPO, with all the moonshot talk of Mars exploration, data centres in space and multi-planetary living. Anthropic and ChatGPT are also likely to make their stock market debuts within months, demonstrating that innovation is alive and kicking.
The US has been built on turning imagination into reality. It falls to ordinary investors to decide whether these ambitious ideas make for sound investments. Many active managers are reserving judgement, looking at whether the various management teams can deliver on their promises before paying lofty valuations for ambitious goals.
For investors who are more focused on fundamentals than aspiration, there are still options. The relentless focus on AI has left behind a whole swathe of US stocks. The US remains the deepest, more diverse stock market in the world, yet the permanent hunt for the pioneers has left much of the market on lower valuations.
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Looking beyond the AI giants
It is these stocks that could be real beneficiaries of any US economic revival that comes about as a result of the end of the Iranian conflict, and the tax rebates currently filtering down to households as part of the ‘One Big Beautiful Bill’. Smaller companies, for example, remain an area to watch. Until the US/Israeli attacks in Iran, for example, it had looked like US smaller companies were on the cusp of a significant revival.
Matt Mahon, manager of the T. Rowe Price US Smaller Companies Equity fund, says: “After falling sharply for almost three years, small-cap earnings began to rapidly improve in late 2025. While trailing 12-month earnings for the S&P 600 fell 36% from the end of 2022 through September 19, 2025, they rebounded 27% through January 27, 2026, leaving them only 19% lower than their 2022 peak.
“This earnings inflection represents a meaningful shift from the past several years, when deteriorating fundamentals were a persistent headwind for small-cap performance. Several forces now appear to be working in small-caps’ favour.”
Admittedly, one of those forces was lower interest rates, which now appear to be off the table. However, lower energy costs should dampen US inflation and at least ensure that interest rates do not rise for now.
At the same time, small-caps should be supported by less noise around US tariffs. The uncertainty had been a headwind, but has now faded as the US administration has been absorbed elsewhere. Smaller companies are also less obvious beneficiaries of the adoption of AI, with signs that AI is starting to feed into business productivity.
Finally, the fiscal stimulus from the ‘One Big Beautiful Bill’ should also provide support for the sector. This stimulus is currently finding its way into households’ pay packets via tax rebates. Mahon believes this will build momentum in the second half of the year and will be a tailwind for smaller companies’ earnings.
Are mid-caps the sweet spot?
Even funds that can invest in both small, medium and larger companies are currently favouring the smaller end of the market. For example, the AXA Framlington American Growth fund has been taking significant positions in US mid-caps, believing they will be supported by many of the same factors supporting smaller companies.
Manager David Shaw says: “Mid-caps do not show the same valuation premium as larger-caps, while President Trump’s economic agenda largely favours domestic US-based sales, an area where mid-caps typically have a greater share than their larger-cap peers. This should leave them benefiting from the recently-enacted tax bill (‘One Big Beautiful Bill’) which encourages domestic capital expenditure and domestic research & development.”
Or more contrarian plays in overlooked sectors
Funds such as the GQG Partners US Equity fund are also exploring parts of the US market that remain overlooked by other investors. Manager Rajiv Jain has historically invested in the mega-cap technology companies, but believes they are currently “meeting their Waterloo”. “They are forced to invest in CapEx when they never had to before. Google used to have $10 billion free cash flow, now
CapEx is running higher than cloud revenue and cloud is becoming a lower-quality business. Its advertising model is running close to saturation. So there is massive CapEx, low free cash flow, and stock-based compensation is a huge issue. Equally, Nvidia is a great, visionary company, but free cash flow is going down too.”
Instead, he has been putting money into the unloved software sector, and ‘real assets’ such as steel, energy and utilities companies. He says: “We look at investment through the lens of “what are the barriers to entry and is the outlook improving?”. If you look at steel, the barriers to entry have become far higher. Try and set up a new steel plant in Europe, it’s very difficult.”
He says energy prices are likely to be structurally higher in the near term in spite of an apparent resolution to the war in Iran. He believes it will take some time to get back to normal, even as the Strait of Hormuz reopens. The damage to infrastructure cannot readily be rebuilt: “Qatar says 20% of its LNG facilities are down and it will take 3-5 years to fix them,” he adds.
He also likes utilities, believing many parts of the world have woefully underinvested in power infrastructure. He is focused on regulated utilities in Brazil, US, Europe and Asia, saying they have highly predictable earnings growth.
The US is good at imagination, but it’s also good at many other things. Investors have been focused on the country’s pioneers to the detriment of the rest of the market. That presents an opportunity for investors to participate in the country’s recovery.
