Why every investor should consider the US stock market

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All information is correct as at 30 September 2022 unless otherwise stated.

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It’s a bold statement. But when you delve a little deeper, the ‘why’ is more clear-cut.

The US market is the dominant player in town – home for more than half of the global stock market. We think it’s simply too big for investors to ignore.

Here, we look at what the US market has to offer and explain why every investor should consider it.

This article isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.

Why the US?

The US has been the world’s leading economic powerhouse in financial markets since 1871. Its long reign of dominance can make it difficult to predict the turning of the tide in the near future.

Let’s start with the economy.

The US often ranks top for many things. One of those is economic indicators, which are used to provide an understanding of the state of an economy. They’re also important in helping investors and analysts discover new opportunities and make any changes to their investments.

Gross domestic product (GDP) is perhaps the most talked about indicator. For good reason too – it measures the size of a country’s economy. In the US, the value of goods and services produced, or GDP, in 2021 was $23 trillion – this lapped the UK’s GDP by seven-fold.

Another key advantage is the US’s demographics.

Its population is still growing, with expectations it could rise further, from 335 million people in 2022 to 369 million people in 2052. This, plus the fact other countries like Japan are battling with an aging and shrinking population, should help strengthen their financial power and encourage future growth.

WHY THE US ECONOMY MATTERS TO INVESTORS

What about the stock market?

Generally speaking, a thriving and robust economy is the catalyst for a rising stock market and increased levels of investor confidence.

If an economy is growing, output will be increasing, and most companies should benefit from increased profits. Higher profits make the company’s shares more attractive, so share prices should rise – and they can potentially also offer bigger dividends to shareholders. Although of course, there are no guarantees.

A long period of economic growth will tend to benefit shares. It’s why the US currently boasts the largest stock market in the world.

Its sheer size and scale means the biggest and most valuable companies trade in the US. In fact, nine of the ten world’s largest companies are listed there*.

Source: Companies by market cap, from 27/09/2022. *Market capitalisation is calculated by multiplying the number of shares in issue by the latest share price.

The US currently has the crème-de-la-crème of the stock market, thanks to its huge economy, entrepreneurial spirit and exposure to the technology sector. This could change in the future and further success isn’t guaranteed.

Is the US too big to ignore? – a focus on US companies

What else to consider?

Income versus growth

We think most portfolios investing for long-term growth should have a significant proportion in US shares. Portfolios looking to achieve a steady stream of income could have a lower allocation to the US market, since it offers a lower yield than most other major countries.

Opportunities and market valuation

The US market is the most heavily researched stock market by economists, investors, analysts, and fund managers around the world. This can make it notoriously difficult for investors to spot opportunities and value gaps in the market before they’re snapped up.

Investing in funds gives access to specialist fund managers who invest in the US. There are managers with successful track records of finding opportunities, as well as the potential to perform well over the long term.

Remember though, past performance isn’t a guide to the future.

Currency

The size of the US makes its currency a ‘safe haven’ in uncertain times. Holding US investments naturally gains exposure to the US dollar. This can help shelter against volatility during a market downturn.

On the flip side, a falling pound means buying foreign investments is more expensive as the pound doesn’t stretch as far. In the same way holiday money won't stretch as far on things, like meals out or accommodation.

When investing with a goal that depends on using a specific currency, consider how investing in a different currency might affect this.

Political risk

When investing in regions like Asia and emerging markets, the political and investing landscape can change rapidly, and government interventions are more common. This can allow companies to grow faster, but increases risk. Investing in developed countries, like the US, has lower political and regulatory risk, though of course things can still change.

The great diversifier

With the lion’s share of the market, there are plenty of investment opportunities to add an extra layer of diversification in the US.

Some would argue it’s impossible to have a truly diversified portfolio without holding some investments across the pond.

In a nutshell, diversification means not putting all your eggs in one basket.

Nobody truly knows which geographies, sectors or companies are going to do well in the future. But what we do know is, over the long term, different areas will perform well at different times, so it pays to be smartly spread.

Keeping your investments globally diversified means you could always have something in your portfolio doing well. It offers the best chance of achieving a steadier return over the long term. It can lower the impact if one of your investments goes through a rough patch, lowering the expected volatility (the price swings up and down) that your portfolio could experience.

Of course, none of the above is certain when investing. All investments can go down as well as up in value, so you could get back less than you invest.