So, the S&P 500 index is expensive and so concentrated that it carries with it a high degree of sector risk. If the tech, and especially the AI, story disappoints then so too could the US benchmark index. That’s the bad news.
The more encouraging message is that this worrying picture is quite specific to this index, indeed to one narrow part of this index. If you look more broadly at the US market, and even more so at overseas equivalents, then both valuation and concentration are much less of a concern.
The good news is that the strength and vitality of the US economy, its innovation and potential for sustained earnings growth can be captured both via a less focused US exposure and also through the US exposure of other markets. A third of the revenues of Europe’s biggest companies are currently captured in North America.
Valuations in many markets around the world stand at a historically wide valuation discount to those in the US. This is particularly true here in the UK.
There are two obvious conclusions for an investor worried about the valuation and concentration of the US market. First, diversify your holdings globally. Second, look carefully under the bonnet of the funds you do invest in. A global tracker fund is likely to have a significant exposure to not only the US, but specifically to the highly valued, over-concentrated bit of the US market from which you should be looking to protect yourself.
Investing in US growth, and the global index funds that closely mirror its performance, has been an easy decision in recent years. There has been no benefit in looking much beyond an S&P tracker fund, or even better a global tech stock equivalent. But if Goldman Sachs’s analysis is right then investing will be more challenging in the decade ahead.
There’s one other bit of good news in the Bank’s analysis. And that is its assumption that the tailwinds that have driven the market higher have further to run in the short term.
It sees the S&P 500 rising to 6,300 over the next year. This optimistic view is predicated on expected earnings growth in 2025 of about 11pc and only a modest decline in the market’s valuation multiple as the robust US economy continues to defy the sceptics.
There is time to rebalance our portfolios. We should use it wisely.
Tom Stevenson is an investment director at Fidelity International. These views are his own.
