The most useful company meetings are those that show you what the narrative is missing. I was reminded of this on a recent trip to the US, split between a conference in Florida and time on the road in Arizona visiting companies at their headquarters. Across the week, I met around 50 US companies.
It showed me that there is no neat one-liner to sum up the environment in the US. The picture is highly idiosyncratic and therefore, for active smaller company investors such as ourselves, more interesting. That said, a few themes did come through loud and clear.
The diverging consumer
Given that it is the largest driver of most developed economies, we must start with the consumer. There has been much talk of the ‘K-shaped’ recovery. My interactions suggest that this is not levelling out. If anything, the jaws of the ‘K’ appear to be widening.
Companies exposed to higher-income consumers, such as luxury retail, high-end hotels, travel and golf, continue to report resilient demand. But at the other end of the spectrum, businesses are seeing weaker volumes and pricing pressure in areas such as personal care, packaged food and alcohol.
This matters because the market often talks about the ‘consumer’ as though it is one homogenous group, but it is not.
A very different defence spending cycle
Defence companies have been performing well recently and the outlook seems favourable, but this cycle appears very different to previous ones.
The obvious assumption is that the largest prime contractors will be the biggest winners but my meetings suggested a more nuanced picture, with demand shifting towards smaller- and medium-sized defence companies that can design effective, scalable and more affordable solutions quickly.
Areas such as defence electronics, sensors, radars, space and hypersonics are seeing strong interest. Holdings such as Curtiss-Wright, CACI International and Furuno Electric are in the portfolio.
AI's expanding footprint: From silicon to the physical economy
AI was mentioned in virtually every meeting, and it remains central to the mood of the stock market. However, the opportunity set has broadened well beyond semiconductors.
The data centre and infrastructure boom is feeding demand in testing equipment, construction materials, cooling, water management, real estate services and natural gas and power infrastructure. In other words, AI is becoming much more embedded into the physical economy.
Last year, at the same conference, many companies were still talking about AI use cases. This year, management teams were more willing to talk about productivity benefits and potential labour reductions. That is a material change.
At the same time, AI disintermediation is a real risk. For the software and IT services sector, businesses with regulatory barriers, compliance requirements, embedded workflows, network effects, proprietary data or deep customer trust appear better placed to defend themselves.
Despite this, even the survivors look likely to have less pricing power in the future and must therefore carry lower valuations than before.
Opportunities in the industrial economy
Tariffs and industrial policy provided another example of why selectivity matters. Some companies are clear winners: steel and aluminium businesses are seeing stronger orders and longer lead times. Additionally, industrials with pricing power, flexible supply chains and the ability to move production closer to the US have generally managed tariff disruption well.
But others have not – companies selling into large customers on long-term contracts, including parts of healthcare equipment and consumables, have struggled to pass through higher costs and are absorbing margin pressure.
There were clear pockets of cyclical recovery. Trucking and freight stood out. After a three-and-a-half-year trucking recession following the pandemic, there are signs of stabilisation.
I spent time at a truck depot in Arizona, where the management team of one of America’s largest fleets sounded more constructive. Some of the excess capacity that entered the market in 2021 and 2022 is now leaving, helped by tighter regulations and industry consolidation.
Demand is not booming, but it is stable, retail inventories are lean and rates have improved recently. A little more demand could tighten the market quickly.
Aerospace was another highlight. One company I met services aircraft engines through a large global workshop network and a skilled technical workforce. It is benefiting as OEMs and airlines outsource more servicing work, while long-term contracts with inflation protection provide a degree of predictability. This is the kind of business we like to study: specialist, hard to replicate and exposed to longer-term demand.
My conclusion from the trip was not that the US economy is uniformly strong or weak, but that the opportunity set is more fragmented, diverse and ultimately more interesting than in recent years.
For investors, the temptation is to focus on the handful of large companies dominating index returns. Yet many of the most revealing signals are coming from smaller businesses closer to the real economy: the truck depot, the aircraft engine workshop, the defence electronics supplier, the cooling specialist, the industrial company that is reshaping its supply chain.
These companies rarely attract headline attention, yet they frequently signal where the most compelling opportunities lie. The trip served as a further illustration of just how expansive the global smaller companies universe is.
Our trust has access to a rich and diverse pool of candidates, affording us the luxury of being highly selective – concentrating our focus on quality businesses that appear undervalued today and that we believe are well-positioned to generate attractive, sustainable returns for our shareholders.
Nish Patel is manager of the Global Smaller Companies Trust. The views expressed above should not be taken as investment advice.