How Asian investors should look at US stocks in 2025

Here is how 2024 panned out for investors: The US barometer S&P 500 Index is up a whopping 29% for the year so far, inclusive of dividends, or more than quadruple the original consensus for the year. Moreover, the US elections were a tame affair, with former President Donald Trump decisively defeating his rival, incumbent Vice President Kamala Harris, with a plurality of total votes. His Republican party also won control of both the Senate and the House of Representatives. 

Here is what two years of the new US bull market means for investors. If you had invested US$1,000 ($1,350) in early January 2023, you are up 63% in US dollar terms, including reinvested dividends. Over a five-year period, from early 2020, you would have more than doubled your money in US dollars, or up over 103%, to be more precise. That period includes the worst pandemic in over a hundred years and a horrendous market in 2022 when the US Federal Reserve (Fed) was racing to raise interest rates to rein in runaway inflation. The benchmark US Fed funds rate went from zero in March 2022 to 5.25% just 15 months later, in what was the fastest recorded rate hiking cycle.

A year ago, the US market gauge was trading at around 19 times 12-months forward earnings or just above its five-year average of 18.8 times earnings. Today, the S&P 500 trades at just 22.3 times the forecast earnings for 2025. So, investors saw a decent multiple expansion as the market ran way ahead of earnings growth this past year. Is it time to sell? Unfortunately, a high price-to-earnings (P/E) multiple is not a stock market sell signal. Indeed, valuation is often a bad market-timing tool. In September 2020, when the S&P 500 Index was hovering around 3,500, the forward P/E multiple of the Index was 24.1 times. Now, the S&P is at over 6,070, and forward P/E is 22.3 times. 

While the market may seem overpriced compared to historical valuations, it may not be fair to compare today’s fast-growing, large global asset-light tech companies that have gross margins of 50 to 80% and are sitting on huge net cash on their balance sheets with asset-heavy, debt-laden industrial companies that dominated corporate America 20 or 30 years ago.

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US corporate earnings have grown faster than the market over the past five years. But that’s because markets anticipate faster earnings growth. Eventually, earnings catch up with the market. “Stretched valuation environment is a product of enthusiasm around equities,” Liz Ann Sonders, chief equity strategist of Charles Schwab, the biggest US stock broking firm, wrote in a recent note. “Multiples can continue to move higher, as was the case in the late 1990s, and there isn’t a strong historical relationship between valuation and forward performance,” she noted. 

Jonathan Golub, chief US strategist for UBS in New York, believes “valuations have an upward bias in non-recessionary periods, but correct sharply around economic contractions.” With recession risks now contained, “multiples are most likely to drift higher in 2025,” he notes. “It’s rare to see significant multiple compression in periods of above average earnings growth and accommodative monetary policy,” Morgan Stanley’s perennially bearish US strategist Michael Wilson wrote in an unusually bullish report recently.

So, how should investors look at 2025? America is still among the fastest-growing developed economies in the world. The consensus estimate for US GDP growth is around 2.6% in 2024. The economy is likely to grow 2.4% in 2025. Goldman Sachs expects sales growth for US companies of around 5% next year. Yet, markets are driven primarily by earnings growth. Earnings per share for 500 top US companies grew 9.7% in 2024 to around US$245. That’s more or less in line with the US$235 to US$250 range consensus forecast for earnings per share in the outgoing year. Consensus forecasts of Wall Street strategists are for earnings per share growth of 16% in 2025. That would take total S&P 500 earnings to US$285 in the new year. Estimates for 2026  are for 12% earnings growth, which will put S&P 500 earnings just under US$320. Assuming no further multiple expansion, the Index should trade around 7,040 by the end of 2025. 

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What’s driving US earnings? Interest rate cuts, for one. The Fed has slashed rates three times this year, bringing the rate down from 5.25% to 4.25%. While rates stay higher for longer because inflation is likely to remain well above 2%, markets are still pricing in further 75 to 100 basis points cuts in 2025. That will take the Fed fund rate down to between 3.25% and 3.50% next year. Lower rates will be a huge relief to smaller listed companies that have been struggling in recent years.

Another big plus is the return of billionaire former property developer Trump to the White House. The market sees the President-elect as probably one of the most pro-business presidents in decades. Trump has picked former hedge fund manager Scott Bessent as his Treasury Secretary and billionaire Howard Lutnick, until recently the CEO of Wall Street investment bank Cantor Fitzgerald, as the next Commerce Secretary. Indeed, Trump sees the Wall Street gauge, the S&P 500 Index, as a key measure of his Administration’s success. He has promised sweeping deregulation as well as more corporate and personal income tax cuts, vowing to cut corporate taxes from 21% currently to 15%. Corporate tax cuts will likely boost dividend payouts and share buybacks. In 2024, stock buybacks by US-listed companies again exceeded US$1 trillion, having dipped to just under US$1 trillion in 2023. The Trump agenda is expected to unleash animal spirits, which could add fuel to the ongoing market rally.

Another key driver for the stock market is a spate of initial public offerings or IPOs. Large fintech companies like Stripe and Klarna are readying their stock market listing in the New Year. Other IPO candidates include AI hardware start-up Coreweave, which last raised funds at a US$23 billion valuation, data analytics and AI firm Databricks, as well as Elon Musk’s SpaceX, which owns the StarLink satellites and was recently valued at US$250 billion. Investment bankers are hoping that the incoming Trump administration’s policies will unleash a wave of merger and acquisition (M&A) activity. Under outgoing President Joe Biden, the US Federal Trade Commission had repeatedly tried to block corporate mergers, deterring other companies from trying. Trump has promised a much lighter regulatory touch and favours corporate consolidation. Private equity giants are also likely to bring a number of their companies to the market and recycle the money they raise from those exits to make new acquisitions. 

Trump has also roped in the world’s richest person, Elon Musk (net worth over US$400 billion), the CEO of electric vehicle pioneer Tesla and another billionaire, Vivek Ramaswamy, to head the new Department of Government Efficiency or Doge. The duo has promised to cut US$2 trillion in government waste. Doge also hopes to reduce needless spending, optimise pricing and produce greater efficiency. In 2024, the US government had revenues of US$4.92 trillion but spent US$6.75 trillion mostly on debt servicing, defence and social services or annual deficit spending of US$1.82 trillion. Without drastic cuts, deficits are likely to exceed US$2 trillion next year. The US government balanced its budget in the 1990s and, under President Bill Clinton, generated surpluses. The country produced a surplus in 2001. After the Sept 11, 2001, terrorist attacks and the war in Afghanistan and Iraq, defence spending surged, and US deficits grew. Though US$2 trillion in cuts are unlikely, Doge initiatives are likely to pare down costs over time. 

There is also the ongoing AI boom, which has inflated the valuation of some tech stocks, particularly chip players like Nvidia and Broadcom. Though Nvidia stock now trades at 33.6 times forward earnings, it is actually cheaper than iPhone maker Apple, which trades at 33.8 times and software giant Microsoft, which trades at 34.1 times estimated 2025 earnings.

“US equities will be better in 2025 than other asset classes as the AI bubble inflates further,” notes John Higgins, chief markets economist of Capital Economics in London. “We expect equities elsewhere to lag those in the US.” Higgins expects US stocks to stay ahead of the pack as Trump’s tariffs weigh on other assets, including international stocks. 

US households have never been so bullish on equities in over 40 years. Yes, four decades. The Conference Board, a non-profit US business think tank, regularly asks Americans how they feel about the stock market to gauge whether they are likely to buy more stocks or whether they are looking to trim their positions or expect to stay neutral on the market. In its latest survey, it found that over 51.4% of Americans expected markets to move higher over the next 12 months. But shouldn’t such optimism be described as “irrational exuberance”, to borrow a phrase from former Fed chairman Alan Greenspan? 

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But isn’t an extremely bullish sentiment often a contrarian indicator and just the right time to sell? Not necessarily. The last time Americans were so optimistic about the stock market was in January 2017, when Trump was sworn in for his first term as US President. The S&P 500 Index ended up 22% in the 12 months following that year’s peak bullishness. 

If, however, you had sold in January 2017 because you saw the exuberance as a great contrarian indicator, you would have missed out on 22% gains in the market that year. Over the past four decades, Americans were the most pessimistic about the US market in early June 2008 — more than three months before the collapse of the Lehman Brothers, the bursting of the subprime mortgage bubble and the start of the global financial crisis. If you had viewed extreme pessimism in early June 2008 as a contrarian indicator and actually bought stocks, you would have been down 21% over the next 12 months. 

Don’t bet on this exuberance fading away, at least in the first year of Trump’s second term. Most working Americans contribute to a 401(k) retirement savings account akin to provident funds in Asia. They set aside a portion of their own savings, which are matched by employers’ contributions. More than half of the new money pouring into these accounts now goes directly into passive Index funds like S&P 500 ETFs. That, in turn, boosts the valuations of the largest companies that dominate the market capitalisation-weighted indices.

Yet, all parties eventually come to an end. At some point, the US economy will likely start showing signs of slowing, or inflation will rear its ugly head again, triggering another interest rate hiking cycle, which in turn jolts the market. Barring an external shock or a black swan event, 2025 is gearing up to be another decent year for investors.   

 Assif Shameen is a technology and business writer based in North America