On the latest episode of our podcast A Dab Of Investment, I talked about the US stock market and why it may not be the goose that lays the golden egg in 2023. 

The US stock market has undoubtedly had a good run in the past. With its track record, one might be tempted to anticipate an exceptional performance in 2023 as well. However, several factors indicate that this market isn’t as rosy as it seems. While it may have performed well in previous years, I feel that it may not continue to do so this year.

The big question here is: why?

First, we must take a look at its past performance and the influential factors.

The US stock market’s track record

The US stock market has been one of the best performing markets over the last two decades. On average, US stocks grew, pushing close to 13 per cent per annum – a stark contrast to the UK stock market which was pushing a mere four to seven per cent per annum, including dividends reinvested. 

However, it is critical to note that this incredible outlook only became bolstered in 2020 – a ripple effect of the pandemic and lockdown. In the early stages of the first lockdown – around February 2020, the US stock market was down 40 per cent. But this didn’t last for long.

Thanks to the big tech explosion in that same year, the stock market had a dramatic turnaround. With more people utilising and purchasing tech products during the lockdown, the tech sector experienced incredible growth, resulting in a corresponding broad-based market shift.

While this spurt may be remarkable, it’s not entirely far-fetched as markets are typically swayed on company size. What might this look like in reality? Let’s say there’s a massive tech company that represents about 50 per cent of the market in terms of size. If it goes up by four per cent, the market experiences a corresponding two per cent increase without even taking other companies into account.

However, despite this seemingly glamorous outlook, there are three major red flags that paint a different picture – warning signs that any potential investors should be aware of.

The first revolves around value measurement. How do you measure the value of US shares? Currently, there is no real way to make this estimate and determine their profitability. 

Secondly, the US market still feels expensive despite  the tech sector experiencing a 50 per cent fall at times.

Finally, the general market volatility and uncertainty within the US economy places a huge question mark on the profitability of US stocks in 2023.

No real way to measure value

There is a heavy focus on tech in the US with giants like Tesla, Apple, and Amazon dominating the scene. However, there’s no tangible approach for estimating the value of these shares.

Tesla shares are a clear example of how perplexing the US scene might be. Although Tesla is unarguably a highly popular internet share, Elon Musk has, in the past, admittedly stated that Tesla’s stock prices are over the top. Reinforcing his point, it is critical to note that despite the company being worth billions of dollars, it recorded tremendous losses before 2020. At some point, its PE ratio soared, exceeding standard PE ratio metrics. 

So, it’s hard to determine its actual value and to tell whether it’s expensive or not.

The same goes for other large US companies like Apple and Amazon. While we – the general public – might applaud their innovation, their sheer size and the speed at which they’ve expanded makes it difficult to determine their value.

Additionally, in comparison with their UK counterparts – Barclays, AstraZeneca etc – who are permanent staples and have been around for some years, these US giants are relatively new. This means that an air of uncertainty still shrouds them. For all we know, Apple could become the Nokia of the 1990s in the twinkling of an eye! 

The US stock market still feels expensive

Historically, US shares have produced very small yields. Thus, the US market’s astronomical growth isn’t tied to its yields. Rather, it’s primarily as a result of share price growth. With the big tech explosion, many more people became confident about investing in US shares. 

But should you really tie up your assets in these shares? 

Traditionally, high volatility shares tend to have a devastating effect for investors when other factors fail to fall into place. This has been the case with the NASDAQ market which has fallen from around 16,000 points in January 2022 to about 11,000 points. Despite this 50 per cent fall, the US still feels very expensive. At the moment, the PE ratio in the US market is still in the mid-20s, well above its historical average. 

There are barely any redeeming qualities out there to erase this notion of the US being expensive. 

General market uncertainty

In recent times, the US Federal Reserve has aggressively raised its interest rates, resulting in treasury bills becoming more attractive and a huge win for the dollar. However, as the Federal Reserve begins to unwind these aggressive interest rate hikes, we may see the dollar weakening again in the second half of this year. This may lead to a slight decrease in share prices and consequently, more buying opportunities for US shares.

Nevertheless, since these buying opportunities are likely to present themselves towards the end of the year, you don’t want them now. In addition, the current volatility of the US market and political uncertainty do not exactly make for a good 2023 forecast.

Our risk portfolio

Although I still hold some US shares, they account for a minor portion of my portfolio, a sharp contrast to our 2020 portfolio where we held a significant amount of US tech shares. Nevertheless, this level of volatility and risk exposure is optimal for me, considering how the funds have fared in recent times. With US shares’ risk levels and the complete lack of clarity in terms of values, they’re not likely to be a major contributor to performance.

We do have some overseas exposure in the form of global funds and these investments exist because it’s important to maintain diversity across all boards. However, the majority of our portfolio is still in the UK.

Independent advice remains the gold standard for anyone seeking to make any investment decisions. If you currently have a portfolio that’s primarily US-based, you can chat with us to see what else is out there for you. At Applewood Independent, we’re committed to helping our clients get better returns for less risk.

If you’d welcome our input, expertise and experience, please get in touch by emailing me at alex@applewoodindependent.co.uk. 

The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.

The value of your investment can go down as well as up, and you may not get back the full amount invested.