U.S. equities outlook stays supported by structural market tailwinds

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U.S. equities outlook supported

Highlights

U.S. corporate earnings are about 50 percent above pre-Covid trend, driven by higher nominal growth and multi-decade low corporate tax rates.
Household cash and wealth in the U.S. are almost 50 percent above trend, mainly among higher-income households, sustaining elevated equity allocations.
Net interest payments for U.S. companies have fallen to more than 20-year lows versus profits, with nearly two-thirds of S&P 500 debt maturing after 2030.

Drivers behind the equity resilience

As reported by Financial Times, the bullish case for equities rests on a broad set of structural factors rather than a single dependence on AI-linked earnings growth.

U.S. corporate earnings are currently about 50 percent above the pre-Covid trend, supported by higher nominal economic growth and multi-decade low corporate tax rates. Outside the U.S., earnings growth has also been rising over the last 12 to 18 months, while the U.S. economy repeatedly surprises on the upside against more cautious consensus expectations.

Higher inflation since 2021 has also changed the relationship between equities and bonds, reducing the diversification benefit that fixed income once offered portfolios. That shift is seen keeping allocations to equities elevated in the coming quarters, with large investors instead turning to options markets and other strategies for downside protection.

Household wealth in the U.S. has risen much faster than its pre-Covid trend, and the gain is not limited to stock prices. Cash holdings are also almost 50 percent above trend, with most of the increase concentrated among higher-income households that both spend more and channel a larger share of wealth back into financial markets.

Why shocks are having less market impact

Another support for risk appetite is the wider crisis-response toolkit now available to central banks. The Federal Reserve's emergency liquidity programme in 2023 is cited as one example of how policymakers can move quickly even during a rate-rising cycle, reinforcing investor confidence that stress can be contained.

Developed economies are also less exposed to oil shocks than in past decades because both household energy spending and economy-wide energy consumption per unit of GDP are lower than they were in the 1970s and 1980s. That helps explain why conflicts such as Russia-Ukraine and tensions in the Middle East have pushed oil prices higher without causing the same degree of damage to riskier assets.

Private-sector balance sheets add another layer of support. In the U.S. housing market, the average effective rate on existing mortgages remains about 2 percentage points below current offered rates, while household debt-service burdens are still below average levels seen in the 2010s. For companies, net interest payments have fallen to a more than 20-year low relative to profits, and nearly two-thirds of bonds and loans of S&P 500 companies do not mature until after 2030.

Faster information flow from programme trading, AI and social media is also reshaping market behaviour. Price declines happen more quickly, but recoveries do as well, strengthening buy-the-dip behaviour, while the growth of index investing can help damp stock-market volatility through rebalancing flows.

In our earlier article on improving earnings revisions in Japan and Europe, we explained why global investors are increasingly reassessing non-U.S. equities as profit forecasts start to move higher. We also noted that banks and defense were among the areas benefiting from upward revisions, while U.S. equities remained supported by a durable earnings backdrop despite concerns about narrow market breadth.

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