US Equities Quarterly update

Market highlights

The fourth quarter was largely uneventful for the first month, with US equity markets flat in the run-up to the US elections. Markets then rallied strongly on the back of the resounding victory for Trump and the Republican Party in general. Trump’s “America First” agenda includes cutting taxes, reducing regulation, increasing energy production and making domestic businesses more competitive. Some of his policies are seen as potentially inflationary but the agenda is overall positive for US companies.

Enthusiasm was dented in December by the Fed’s hawkish rate cut. When announcing the largely anticipated 25 basis-point (bp) reduction, Chair Powell suggested the Fed would be taking a more cautious approach from there. The latest “dot plot” showed the committee members reduced by half the rate cuts they expect in 2025, with only 50 bps of cuts now forecast this year, and the same amount in 2026. Although the Fed still expects inflation to continue easing in 2025, Powell warned that it might be slightly higher by the end of the year than they had recently predicted.

The S&P 500 returned a respectable 2.4% in Q4, while the more tech-heavy Nasdaq-100 gained 4.9% in the quarter. After a strong Q3, the S&P 500 Equal Weight index recorded a -1.9% loss in Q4. Performances of the three benchmarks were broadly equal for the quarter until the end of November, after which the higher-growth Nasdaq began to outperform while the more balanced approach of the Equal Weight index suffered.

Q4 performance

Q4 ETF flows by broad categorisation (US$ millions)

Q4 flows into US sector ETFs (US$ millions)

Most US equity categories saw positive flows in Q4, but ETFs tracking the standard S&P 500 index continued to dominate, with approximately US$30 billion of NNA, most of which came in after the election. So-called “Trump trades” were seen elsewhere, including flows into US small caps (US$4.5 billion of NNA) and financial sector ETFs (US$2 billion of NNA). Investors expect these companies to benefit from Trump’s policies on deregulation and promoting domestic competitiveness.

Outlook

While it’s likely that US equity performance in the coming months will be driven largely by the enactment of the various Trump policies, most of these are already known and, as such, possibly already priced into the market. That said, the extent to which Trump will follow through on his campaign pledges remains a question, especially as it relates to trade tariffs, as well as secondary impacts that could affect the fortunes (negatively or positively) of US companies and the economy.

Interest rates could also have an effect on certain rate-sensitive segments. The Fed is likely to leave rates unchanged in the short term, during which time the committee will have additional data on inflation and employment. It will be worth monitoring consumer spending and confidence levels in the coming months.

We would expect the US equity market to remain well-supported in this environment and for the relative strength of the US dollar to benefit non-USD investors. Some of the companies that are expected to benefit from Trump policies include financials and those involved in security (physical and cyber), energy infrastructure, cryptocurrencies and AI.