As 2024 draws to a close, US equities are on track to deliver another consecutive year of double-digit gains as the rest of world’s equity markets underperform.
US equities are up almost 30% this year, roughly triple the return of the MSCI World ex USA index, which is up just 9.9% year-to-date.
This divergence between the US and the rest of the world means that regional allocations are starting to matter more than overall asset allocation, according to Lombard Odier chief investment officer Michael Strobaek.
“If you had been on the wrong side of the US trade in equities, even if you had 50% equities overall, you would have materially underperformed still,” he said in a recent presentation to media.
“Our view is that with Trump in the White House and the Republicans solidly sitting on US regulations, this divergence trade will go on.”
The outperformance of the US has been “solidly backed” by corporate earnings, added Strobaek. “I believe even before Trump that there was an exceptional element of US earnings that is quite sustainable.”
Since most of US corporate earnings growth has been driven by the success of the large mega-cap tech companies on the back of AI, some market participants fear the concentration of the largest tech companies is set to unwind.
But Strobaek notes that in the past, bull markets have always driven by themes and trends that inevitably lead to some degree of market concentration.
“I’m not of the view that we’re living with a bubble, and I’m certainly not of the view with Trump in the seat, that anybody has a broader interest in deflating any bubble,” he said.
“I don’t believe it is smart now to begin diversifying too strongly away from tech and have equally weighted benchmarks and portfolios,” he added.
“Listen to what markets are doing and saying; markets are extremely efficient. The reason we have concentration is because markets have bought successful companies. It really as simple as that.”
US exceptionalism to accelerate
Lombard Odier has been overweight US equities since the start of the year and continues to maintain this position going into 2025.
“Our early strategic decision to place US equites at the core of our strategic asset allocations has performed strongly,” Strobaek said in a note detailing Lombard Odier’s outlook for next year.
He argued that the US economic engine is “set to accelerate” and that a second Trump administration’s “America First” policies “make the prospects for the rest of the world less compelling”.
This is not just a Trump phenomenon, he explained, given the fact that the US has committed huge amounts of resources to defend itself from strategic competition.
“At today’s values, the US has already injected capital worth more than double the post-World War Two Marshall Plan that rebuilt Europe,” he said. “US financial asset outperformance should not, therefore, be surprising.”
