I am reminded this morning of an email exchange with one of our clients on 14th January this year.
We had just shared our rather cautious view in a Friday market update of future US equity returns, given the higher valuations at the start of the year, along with the concentration of the index on the ‘Mag 7’. In that update I had quoted similar views expressed by research from both Goldman Sachs and Vanguard, also predicting significantly lower returns, 3-5% p.a. going forwards, compared to the returns enjoyed in the previous decade. Both notes had been published just a few months earlier in 2024 and ahead of the US election.
Of course, by mid-January this year we knew who would be the in the White House (but not what would happen next!) and market exuberance was in full swing. Our somewhat confused client shared a recent update he had seen from Goldman Sachs since the start of 2025, which contradicted the earlier 2024 Goldman Sachs research and read along the lines of:
“The case for overweight US has only grown:
- we expect the US economy to grow +2.3% in 2025,
- substantially ahead of any other developed region
- and US companies to grow earnings by +10%
- we only assign a 20% chance of the US entering a recession
- and expect the S&P 500 to rise by +8% over the next 12 months”
Had the election result really knocked the earlier Goldman Sachs research for six?
After pondering it over the weekend we replied to our client:
“of these 5 bold assumptions, number 3 & 5 look the weakest to us. A combination of higher bond yields and slowing earnings growth (maybe positive, but not growing as fast as anticipated) would be sufficient to halt the index and even send it down.”
I’m not going to crow too much but it is worth just reminding ourselves that, when views become highly correlated, the consensus is rarely right. Equity markets are driven by fear and greed or FOMO, as the youngsters refer to it now, and the latter is a powerful beast. Even though there were clearly some analysts in Goldman Sachs who had stepped back and provided a reasoned outlook of lower future returns just months earlier, the Trump election victory was enough to let FOMO get the upper hand.
It is also worth considering that the US equity market turmoil of the last few weeks is not entirely caused by Trump. For sure, his actions have been a catalyst to swap FOMO to fear, but the market falls have only been possible because of the hugely frothy valuations of some massive US companies, which were relatively easy to see.
As regular readers will know I always like to use Tesla as a great example! Tesla stock has halved in value since its high in mid-January. If you read the media, you would assume this is entirely down to the actions of Musk in the last few weeks and that he has destroyed the value of the business. Again, his actions have clearly been the catalyst for a re-evaluation of the business value, but the value of the company has only been able to halve in under two months because it was so highly valued in the first instance. It peaked at around $1.4 trillion!
So, is Tesla now cheap?
Well, let’s look at one of its global competitors, BYD: it now sells more cars than Tesla, it is rolling out charging stations that can re-charge their cars in 5 minutes for a full range, it is offering self-driving for free now on most of its model range, and its entry-level compact family car is sold in China for the equivalent of just $9,500.
Tesla may be moaning that tariffs will hurt its costs, but without tariffs Tesla and most other US and European car makers would be facing collapse, in just the same way as the UK motorbike industry collapsed to Japanese manufacturers in the 1990s.
But guess what? Tesla is still valued at seven times BYD and, according to Yahoo finance, is still trading on a price earnings ratio in excess of 100x – and that’s before we see the impact of the recent protests on its sales revenues.
I know Tesla bulls will say it’s a technology company, not a car company, and it will dominate robots in the home and driverless taxis, but for now over 70% of its revenue is from car sales. If you deduct the value of BYD from Tesla’s market cap, investors are paying $650bn at today’s 50% reduced price for just 30bn of other non-car sales revenue, over 20x that revenue.
Tesla is the extreme example, but Nvidia as a manufacturer is still valued at over 60 earnings, which are based on a current massive 50% plus profit margin. Is that sustainable? Amazon is still valued at 40x earnings and Microsoft 30x. All these companies had seen their share values pushed up by the fervour around AI and then the Trump victory. They have cheapened but they are still on the expensive side.
There could easily be more turmoil to come.
Year-to-Date Returns
So far 2025 is producing some big disparities in the fund returns we are seeing and a reversal in the leader board, with most active managers now outperforming passive funds
Here is the year to date return for all our funds after a little under 3 months of the year.
We are seeing a c20% gap open up between our top global value managers and the US index and smaller companies funds, our active Fidelity US fund falling half as much as the index fund, Ruffer earning its keep and consistent returns from our corporate bond funds, which have held on to 1%-3% so far this year.
Our main equity portfolio, which had underperformed the IA Global Equity benchmark in recent years, is (for now) getting ahead.
We have consistently had good fixed income returns and it’s great to see the hard work and conviction of the investment team coming through in equity performance as well.
It feels like it has been a little calmer in the last few days in terms of geopolitical activity – Trump’s claims of stopping the two main global conflicts in a matter of weeks may come home to haunt him. Our guest writer, Stephen O’Sullivan offers some great insight into the differing approaches of China and the US to global trade.
We started the year saying how much we liked the corporate bond fund outlooks and the greater certainty they offered over equities. So far this has been borne out.
