Three areas defining US equities in 2025

How did US equities perform in 2024?

US equities were the standout in 2024, with the S&P 500 returning 38.16% in Australian dollar terms. This impressive performance was driven by solid earnings growth, the prospect of a 'soft landing' following the Fed's commencement of its easing cycle, and optimism surrounding Trump's return to office. This optimism also contributed to multiple expansion, with the price-to-earnings (P/E) ratio now trading at almost 28x. On every measure, including CAPE Shiller and price-to-sales (P/S), valuations are high relative to historical norms.

The challenge with valuations is that they don’t ultimately determine your return but as the saying goes ‘it is not what you buy but what you pay’. For long-term investors, this means the entry point needs to offer some 'margin of safety.' With the equity risk premium, which compares the earnings yield relative to government bond yields, now negative, the risk return tradeoff between US equities relative to bonds is limited.

The question now is how to potentially navigate the asset class this year. Here are three areas we think will define 2025:

Assessing fundamentals will be prudent

We would say that it is time for investors to consider fundamentals because Earnings per Share (EPS) growth matters and a focus needs to be on earnings momentum not price momentum. 2024 was a US Equity Momentum market – the MSCI USA Momentum index outperformed the MSCI USA index by over 700bps. There were other stocks that gazumped the Magnificent Seven, such as Palantir Technologies, which was up over 350% and look at its financials!

Indeed, 2025 earnings estimates for the Magnificent Seven went up by +27% during the year, but the rest of the 493 names saw a -4% downgrade, keeping headline S&P 500 expectations flat for the year. For the past six months, however, headline estimates for this year experienced a -2% downward revision, driven by weakness outside of the Magnificent Seven.

Can the US economy maintain its strong momentum?

If EPS can’t support the price and we know the re-rating in 2022 was driven more by price than earnings, what does the US government bond yield curve tell us? The ISM manufacturing and services activity figures came in hot last week, and the US 10-year government bond yield has shot up to 4.70%. Service inflation remains sticky and slow to decline, with the labour market staying tight, leading to a slow deceleration in wage growth.

Furthermore, a surprising number came from the ISM services print which was 54.1 in December from 52.1 in November, though it was higher in September and October, but as we saw in the ISM manufacturing PMI, there was a flurry of pre-tariff inventory building (the subindex rising to 49.4 from 45.9). What was really fascinating was the fact that only 9 industries reported any growth at all during the month, down from 14 in both October and November — tied for the second lowest reading since May 2020. Post 17th December the Fed dot plot went from 4 to 2 25bps cuts, the surprise could be no cuts at all in 2025!

Does this mean the US is slowing down? The JOLTs report (job openings) tells a funny story Job openings +259k run-up in job openings to 8.098 million, the highest level since May 2024 (and followed a hefty +467k in October). But this is a giant head fake. The entire increase and then some was in professional and business services (+273k), which is a proxy for temporary part-time employment. Outside of that, job openings shrunk -14k, with declines in key sectors like retail (-4k), manufacturing (-56k and down four months in a row), and leisure/hospitality (-83k in the steepest decline since May of last year).

Fiscal landscape

With elevated debt levels, fiscal policy is unlikely to be overly accommodative. This constrains potential economic stimulus and heightens sensitivity to monetary policy adjustments. January’s baseline fiscal spend is projected to change significantly between now and July 2026, initially estimated at $500 billion, but Musk and Vivek are now suggesting it could reach $2 trillion by July 2026! One thing we all know is that austerity measures are not popular.

Where does this leave us?

It’s important to be selective. Fundamentals should be a primary consideration. The investment backdrop is more challenging now than at any other time in the past two years, with valuations trading in the top decile, stalled-out earnings revision momentum, weak earnings breadth, and heightened policy uncertainty. It has become even more important to stick to earnings fundamentals as the macro backdrop remains volatile and uncertain. Hence, we continue to recommend a focus on earnings momentum (revision/growth/guidance), not price momentum which was what worked last year. Here are three ETFs that invest in US equities which screen for company fundamentals:

VanEck Morningstar Wide Moat ETF (ASX: MOAT) gives investors exposure to a diversified portfolio of attractively priced US companies with sustainable competitive advantages according to Morningstar’s equity research team.

VanEck MSCI International Quality ETF (ASX: QUAL) gives investors exposure to the highest quality large and mid cap companies based on key fundamentals including (i) high return on equity, (ii) earnings stability and (iii) low financial leverage. It is overweight US equities relative to international equities benchmark, MSCI World ex Australia Index.

VanEck MSCI International Small Companies Quality ETF (ASX: QSML) gives investors exposure to quality small cap companies. It is overweight US equities relative to international equities small cap benchmark, MSCI World ex Australia Small Cap Index.