For the past decade, the S&P 500 has been the undisputed king of global stock markets. Fuelled by the meteoric rise of US tech giants such as Apple, Microsoft and Nvidia, the index has delivered breathtaking returns. But is its reign coming to an end?
The US market is expensive, disruptive threats are emerging and now we have a potential trade war on our hands.
The S&P 500 trades at a cyclically adjusted Shiller price-to-earnings (P/E) ratio of just over 38. That’s more than double its long-term average of about 16. It’s only been higher once before – during the dotcom boom in 1999.
Can the US stock market really flop?
High valuations aren’t always a problem. Investors are happy to pay a premium for companies with strong growth prospects.
But it does leave less room for error. If corporate earnings disappoint or growth slows, we could see a sharp correction.
Then there’s the AI story, which has lifted the US rally to the next level. ChatGPT and other generative AI tools cemented the view that the US would dominate this transformative technology.
Then China’s DeepSeek rocked up. It appears able to a similar job for a fraction of the price.
DeepSeek will either undercut US mega-caps like Nvidia, or boost demand and power them even higher. As yet we don’t know.
Then there’s politics (isn’t there always). President Donald Trump’s tariffs could potentially trigger a global trade war.
Many of the S&P 500’s biggest firms rely heavily on international sales. If Trump’s targets retaliate, their earnings could take a hit.
One possibility is that investors start looking beyond the S&P 500 for opportunities. Enter the FTSE 100.
The UK’s flagship index has been overshadowed by its US counterpart, but does have distinct advantages. First, it’s cheap, trading at around 15 times earnings. That offers some risk protection if markets turn sour, although there’s no guarantee it won’t fall as well.
The FTSE 100 could now be a winner
Second, the FTSE 100 is packed with high-quality dividend shares. Companies like AstraZeneca, Shell and Unilever have a long history of rewarding shareholders with steady, reliable payouts.
Global asset manager Schroders (LSE: SDR) often flies under the radar but is worth considering, I feel. Its shares have struggled lately, falling 13% over 12 months and 35% over five years. Yet they’ve now jumped 10% in the last month.
Schroders has a stellar trailing yield of just over 6%. Its dividends will look even more attractive as UK interest rates fall and yields on cash and bonds slide. And it still looks good value with a P/E of around 14 times earnings.
It does face one big threat. With a hefty £777bn of net assets under management, it has good reason to fear a trade war. Those assets could take a beating if things turn nasty.
The UK is facing its own challenges, from sluggish growth to persistent inflation. But as the S&P 500 wobbles, more investors may consider diversifying into defensive, income-paying UK stocks.
The US market isn’t doomed, but investors may tread more carefully. Has the S&P 500 had its day? Maybe not, but its glory days could be over for now.
