Over the past year, the main FTSE stock market’s gained 10.5%. By contrast, the S&P 500‘s up 31.4% over the same period. The difference in performance has been pretty stark, leading some investors to think about allocating more money to US stocks next year. Here’s why I don’t think this is the best idea.
Strong gains in 2024
One factor why the S&P 500’s done so well is the rise of artificial intelligence (AI) as a key investing theme. The US stock market’s home to many of the largest tech companies and firms that are leading the way in terms of AI development.
Another influence has been US economic performance versus the UK. For example, the Q3 2024 GDP growth rate for the US was 2.8%. By contrast, it was just 0.1% for the UK. Given that the stock market’s a key barometer for the economy, it doesn’t surprise me given those figures that one market has really outperformed the other.
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Finally, the recent election result in the US has provided a final quarter surge in stocks. President-elect Trump is seen as pro-business, with potential for deregulation and easing corporate red tape.
Looking ahead
I think 2025 will be different. The current price-to-earnings ratio of the S&P 500 is 31.17. For the FTSE 100 it’s 15.5. Put another way, the US market’s twice as expensive as the UK. So from my perspective, I struggle to see the US beating the UK next year as the valuations just don’t match up.
The election victory might have given US stocks a boost in the short term, but there are implications for next year. The likely surge in fiscal spending could be inflationary, forcing the Federal Reserve to keep interest rates higher for longer. This shift could spook US investors, causing the stock market to fall.
In the UK, inflation’s been around the target 2% for six months. This bodes well for further interest rate cuts next year. As a result, a lower base rate could help to spark a boom in economic activity which has been missing in 2024. If seen, I’d expect UK stocks to feel the benefit.
A potential benefactor
As an example of a UK stock that could do well from lower interest rates, investors can consider Target Healthcare REIT (LSE:THRL). The investment trust share price is up 5% over the past year, with a current dividend yield of 6.61%.
The trust holds a portfolio primarily focused on care homes and other healthcare-related properties. It buys, manages and sells properties, aiming to benefit from income made from leasing them out. When it purchases a new site, some of this is funded by debt. As a result, lower interest rates in the future should ease the funding costs.
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With commercial property values in the UK still in a bit of a slump, a spark in activity next year could increase the value of Target Healthcare’s portfolio. At the moment, the share price trades at a 26% discount to the portfolio net asset value (NAV). The stock could rally next year to close this discount.
A risk is that healthcare properties is quite niche. The business isn’t diversified across other types of property usage, which some investors might see as a problem.
