As President Trump begins his second term, markets are braced for policy changes that could impact the economic outlook. Investors are watching closely how his administration’s proposals, including tax cuts and trade tariffs, transition from rhetoric to action. The Federal Reserve’s current stance suggests no immediate rate cuts, with inflation and rising bond yields adding to market caution.
Trump’s trade policies, particularly the potential for increased tariffs, have raised concerns about higher input costs for businesses and rising prices for households. While markets hope tariffs will serve as a negotiation tool, fears of disruption remain, adding to the likelihood of market volatility.
After two strong years for US equities, investors may be undecided about throwing caution to the wind for a third. The US stock market currently trades on an estimated 21 times the amount companies are expected to earn this year – a little above the market’s five-year average of 20 times1. Against that, the dominance of the technology companies continues and today, the market’s ten largest stocks make up around 37% of the S&P 500 Index2.
Tom Stevenson, Investment Director at Fidelity International, highlights opportunities amid shifting US dynamics: “The expectation is that Trump 2.0 will mean tariffs, tax cuts and less regulation. While his policies may drive growth, they also introduce new risks. That’s not all good for business – it is likely to be inflationary and threatens a more unstable environment for global trade.
“Despite current uncertainties about the precise outlook for inflation, the US economy remains resilient, with deregulation and tax cuts offering potential catalysts for growth.
“Smaller companies are beginning to outperform big tech, driven by their domestic focus and benefits from lower taxes. While AI continues to dominate the narrative, now is the time for investors to look beyond last year’s winners, focusing on companies that will leverage AI to enhance productivity and profitability. Active investment strategies have a chance at least to sift the ultimate winners from the losers and may be a better option from here.”
Against this backdrop, Tom Stevenson shares three fund picks from Fidelity’s Select 50 to navigate the evolving US market:
- “My first pick is the Brown Advisory US Smaller Companies Fund. Trump 2.0 should favour smaller, more domestically focused US companies. And their valuations are less stretched than the tech giants. The Brown team is experienced and has a conservative approach to bottom-up stock selection.”
- “My second pick is the Dodge & Cox Worldwide Global Stock Fund. I’ve recommended this fund before and it has delivered well. The manager often invests in companies with depressed share prices. This might appeal to investors still wishing to participate in the progress of the US stock market but who are cautious about the valuation of the market as a whole.”
- “A more racy selection would be the Brown Advisory US Sustainable Growth Fund. We favour this fund for its experienced management and the strong pool of company analysts it draws on. The fund is mostly invested in larger companies with a durable competitive advantage and steady rather than necessarily rapid growth. It also has a focus on quality.”
