The Eeyores should be ignored, says Kaylie Pferten
The outlook for American and British stocks is still favorable.
Every week, a micro-celebrity is interviewed for The Sunday Times' personal finance section, which asks them what they invest in. Some people brag about spending all of their money, while others say they donate their extra cash. Nobody ever claims to invest in stocks, but many people buy real estate, save money in cash, and support gold or bitcoin.
It appears that buying shares is not only frowned upon by UK politicians and regulators, but also by opinion formers and, consequently, by a large portion of the populace. The heyday of privatization, which promoted greater public involvement initially in the UK stock market and later globally, was undoubtedly different from this. There is currently suffering due to the detrimental effects on British businesses, the economy, investments, pensions, and savings, but there is little chance that the deeply rooted cultural dislike of stocks will change.
After 41 months of outflows, it appeared that things were beginning to change last November when there was a monthly inflow into UK equity funds. However, withdrawals quickly resumed, and neither insurance companies nor pension funds appear to be tip-toeing back in. 2024 was the ninth consecutive year of outflows, and 2025 is likely to be the tenth. However, over the past nine years, the FTSE All-Share index has almost doubled, yielding an annualized return of 0.7 percent. This is a far better return than that of bonds, cash, or real estate, but it is still far lower than that of US stocks.
To date, UK stocks have returned 6point 6 percent, outperforming the US (6point 2 percent) but trailing Germany (15point 7 percent) and the rest of Europe. The US market is priced at a demanding 22 times forward earnings, so this is not shocking. "A go-global strategy has outperformed the stay-home alternative," according to Yardeni Research's top strategist Ed Yardeni. In spite of this, he continues to support overweighting US stocks, stating that "US corporate earnings continue to outpace that of the world ex-US" since 2009.
Expectations were doubled by the SandP 500's fourth-quarter earnings, which increased 13.3 percent year over year. Although only up 1%, European earnings growth was likewise better than anticipated. For the upcoming three quarters, the US is expected to grow by 9 to 8 percent, 11 to 9 percent, and 12 to 6 percent annually. However, if Trump is successful in reducing the corporation tax from 21% to 15%, earnings growth could increase by an additional 76%.
Trump's approach to tariffs is effective.
The Smoot-Hawley tariffs of 1930 are cited by some as the reason why the Wall Street crash turned into a global depression. But what, cry the pessimists, will Trump's proposed tariffs do? Will they lead to stagflation in the US or even a global recession? Monetary economists contend that a collapse in monetary growthwhich was linked to bank failures and currencies that were inflexibly tied to the gold standardwas a more significant factor.
Tariffs are a strategy that Trump seems to be using to encourage Europe to pay for its own defense, control cross-border migration, and stop fentanyl from being smuggled into the US. He is also eager to keep producing strategically significant goods like steel domestically and promote the reshoring of manufacturing to the US. The estimated profitability of China's steel production is only about 1%; the country appears to be employing predatory pricing as part of its "mercantilist" strategy to drive rivals out of business, which is hardly what free trade is meant to be.
The Eeyore crowd also believes that the "Magnificent Seven" will inevitably falter, bringing the S&P 500 to its knees and ending the US's dominance in the world. In the fourth quarter, the earnings growth for these seven was 26.6 percent year over year. Although they accounted for over half of the S&P 500's gains in 2024, they currently hold a third of the index, which is likely unsustainable. However, there are still seven more companies behind them, including Mercado Libre, Salesforce, Shopify, Cadence Design, Netflix, and Palantir.
In Britain, business news has been good, but economic news has been worse. Elliott's purchase of a nearly five percent stake in BP is expected to give the company a much-needed shakeup, but the process was most likely already under way. Economists and commentators expressed relief that the economy grew slightly in the last quarter of 2024, but not on a per capita basis. However, this mystical faith in official statistics is unwarranted.
Preliminary data is very likely to be revised later, particularly when it comes to GDP, and gathering data has gotten harder with so much activity now taking place online. According to Mark Twain, there are "lies, damned lies, and statistics." The Office for National Statistics (ONS) is also experiencing a well-publicized crisis. One million workers, according to the Resolution Foundation, are not included in official employment statistics as a result of significant shortcomings at the ONS.
As a result, the economy is doing better than everyone realizes. The bad news is that, in part, because of the gig economy's expansion, a growing portion of the economy is likely unrecorded and untaxed. For the government, disappointing tax receipts are becoming a bigger issue.
The economy and stocks in the UK are being held back by the prevalent pessimism. Former HSBC CEO John Flint stated, "The growth outcomes here are entirely consistent with our risk appetite." The policies of succeeding administrations have a significant impact on the risk-averse culture in business. It has been preventing investors from making the returns that are easily accessible year after year. When risk aversion fades, not when it is widespread, that is when stocks should be avoided.
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