Concerns around the economic impact of Trump’s tariffs look to be receding, at the same time, hopes of rate cuts are rising.
This is lifting America’s stock market to fresh record highs.
Meanwhile, geopolitical tensions also seem to be easing following Israel and Iran’s ceasefire. But the recent optimism could prove to be short-lived, so investors still need to be prepared for volatility.
US stock market performance
Looking for opportunity outside the big names
Wall Street’s 10 largest companies are dominated by big tech, which have been largely responsible for the US stock market’s outperformance over the last five years.
But it could pay to take a broader view. Here are three names outside of the so-called ‘Magnificent Seven’ that we think are worth considering as part of a diversified portfolio.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Ratios also shouldn’t be looked at on their own.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
Intuitive Surgical – a clinical focus on growth
Intuitive Surgical is the market leader in robotic surgery.
Its Da Vinci systems allow surgeons to make smaller incisions, be more precise and more clearly view the surgical target. They have been shown to improve patient outcomes as well as lower the overall cost of care.
That’s helped power average revenue growth of 14.6% over the last ten years with only one down year in 2020 when health systems buckled due to COVID-19.
The systems lean into trends like an ageing population and a drive for efficiency across global healthcare systems.
Emerging competition is a risk to monitor.
But regulatory barriers, investment in technology and training by hospitals, as well as Intuitive’s pace of innovation, mean that its dominant position is difficult to upend.
The company was an early adopter of artificial intelligence (AI) and here we see further scope for monetisation.
Market forecasts expect to see mid-teens revenue growth to continue for at least the next few years. There’s still a huge market to go for and if ongoing product rollouts are successful, there’s some potential for forecasts to be beaten. But there can be no guarantees.
The growing base of installed systems generates passive income through sales of services and consumable parts, and recurring revenue is close to 80%.
Intuitive’s also one of the most profitable companies in its sector. Tariffs are expected to dent margins a little, but the impact looks to be manageable.
Its cutting-edge surgical systems and attractive business model haven’t gone unnoticed by investors, and its valuation is at a significant premium to both the long-run average and its peers.
We’re optimistic that its steady growth trajectory can continue or accelerate, but the market is likely to punish any missteps. That’s a risk any incoming investors need to be willing to accept.
Oracle Corporation – sun shines over Oracle's clouds
Oracle is known for its leadership in data storage and business software, but it’s also become a formidable force in cloud computing thanks to the surging demand for infrastructure from AI companies.
Oracle’s pivot to cloud is rapidly gaining momentum, highlighted by a 52% surge in cloud infrastructure revenue to $3bn last quarter.
But the real eyecatcher is a 41% jump in the committed revenue backlog to $138bn. That provides strong revenue visibility and is expected to more than double over the next year.
What sets Oracle apart is how smoothly it connects its powerful data storage with flexible cloud services. This means businesses can keep their data securely in Oracle's databases and easily use it through Oracle’s cloud or other cloud providers – whichever suits their needs best.
On top of that, Oracle helps clients to securely train AI models using their own data. This lets businesses build unique AI solutions tailored to their own needs, giving them a strong advantage over competitors as they grow their AI capabilities.
That said, there are some challenges to keep in mind.
Oracle currently commands only about 3% of the cloud infrastructure market, which remains dominated by Amazon and Microsoft. Rising economic uncertainty could dampen IT spending. However, we believe Oracle's recurring cloud subscription revenues and the ongoing digital transformation trends seen among businesses provide some cushion against the headwinds.
Oracle’s net debt levels have been on the rise, reflecting heavy investment in the infrastructure required meet its growing demand. The balance sheet looks manageable for now but if growth doesn’t materialise as expected, then it could become more concerning.
While the stock trades at a premium, much of that valuation falls on the expectation of continued strong growth, fuelled by AI adoption.
Success now hinges on Oracle’s ability to turn its cloud and AI ambitions into sustained, profitable revenue, and any missteps could lead to volatility.
Caterpillar – revving up the growth engines
For nearly a century, Caterpillar has been building mission-critical heavy machinery.
The company operates in three core business areas – construction equipment, mining machinery, and power systems.
Recent results reflect a weakening construction market, with sales dropping in all three segments. Lower volumes combined with weaker pricing mainly drove this decline.
Despite the softer near-term outlook, we see longer-term positives in all three areas.
In the US, overall infrastructure spending is still strong, with projects being funded by the Infrastructure Investment and Jobs Act (IJA).
For mining equipment, commodity prices have come down but remain high enough for continued investment.
Longer term, we see increased demand for materials that help support the global energy transition, and Caterpillar's products help make that a reality.
In Energy & Transportation, Oil and Gas extraction equipment sales might be hitting their ceiling, but Caterpillar's betting on cleaner alternatives. Their green hydrogen generators help companies cut emissions while keeping the lights on, making it a win-win that opens new markets.
The AI boom is also driving massive data centre construction, creating surging demand for reliable power generation.
Big tech companies are turning to Caterpillar's range of generators to meet these energy needs. This is estimated to boost Caterpillar's revenue by $2bn, offsetting potential weakness in their other business segments. Remember though, nothing is guaranteed.
Moreover, Caterpillar’s services business covers repairs and upgrades across its product life. This creates a reliable, ongoing revenue stream that isn’t tied to new equipment sales.
The valuation sits a touch above the longer-term average, but we don’t think it looks too demanding right now, giving an attractive entry point to a high-quality business.
Investors should be aware that the business tends to peak and trough with the economic cycle, and we’re in a weaker period right now, adding some short-term risk to earnings power.
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.
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