US equities have come under pressure this year from myriad concerns, including elevated inflation, rising interest rates, slower growth and geopolitical tensions.
Amidst this backdrop, US markets are confused. With the US Federal Reserve set to continue raising interest rates over the coming months, equity market volatility will no doubt persist and price-to-earnings (P/E) will likely remain under pressure. This means that company earnings seem bound to be the main driver of returns for investors.
Although earnings for the second quarter of 2022 were better than expected, the outlook for profits rests on the ability of companies to defend profit margins.
Despite this, investors are persisting with the US stock market and the recent sell-off has created opportunities to invest in select areas of the market at attractive prices.
While investors must tread carefully, some US stocks can offer an opportunity to shelter from the turbulence in global markets, in part due to the sustained strength of the jobs market. Within this environment, investors should focus on diversification, while also seeking out quality companies with durable competitive advantages that can withstand any storms ahead.
Maintaining balance between value and growth
Over the past few years, US equity markets have continually rotated favour between value and growth. Except for the first quarter of 2021, when value outperformed, growth emerged the clear winner last year. Yet today, value stocks are once again outperforming as investors try to shield themselves from rising inflation and geopolitical instability.
With the market expected to continue the relay, passing the baton between value and growth, having a balanced portfolio which integrates both approaches, may be more attractive than ever – particularly for long-term investors.
Taking advantage of market dislocation to tap into US growth
For many growth investors, high company valuations built up during recent years made it hard to justify adding extra exposure to some US growth stocks. While this was most notable in the technology sector, it impacted investors across the US market. But now, thanks to recent share price falls, a number of areas look more attractively valued.
One growth area we are particularly optimistic about is cloud and digital advertising. An example is technology bellwether Microsoft, a global leader and most known for its computer software business. The company interacts with almost everyone in the world through its brands and the reliance on Microsoft products globally has created an economic moat for the company, enabling it to protect its significant margins.
This, combined with an experienced management team, means Microsoft has the defensive qualities to weather a tougher economic backdrop. Despite its size, Microsoft still has a compelling growth story as its cloud and digital advertising businesses are underappreciated by the market, particularly as the latter division has grown faster than its counterparts in recent times.
Focus on the fundamentals of attractively valued stocks
Patience is key when comes to value investing. When looking for US equity gems, we take a high-conviction approach, focusing on attractively valued companies that have great management teams and strong balance sheets. These qualities should mean the share price will eventually be rerated higher by the market if you are patient.
This applies to companies such as Weyerhaeuser, one of the largest timber real estate investment trusts (REIT) which has been a beneficiary of the increase in global demand for timber. One of the largest private owners of timberlands in North America, with approximately 11 million acres, and managing an additional 14 million acres under long-term licenses in Canada.
Furthermore, the company manages these timberlands on a sustainable basis in compliance with internationally recognised forestry standards.
Overall, there are bright sparks of opportunity for active managers navigating the US market today, but it is important that we remain balanced and continue to monitor incremental risks that could represent headwinds.
Fiona Harris is an investment specialist in US Equities for the JPMorgan American Investment Trust. The views expressed above should not be taken as investment advice.