US equities: is the American growth story finally running out of steam?

For years, US equities have been the powerhouse of global markets, delivering extraordinary returns and dominating UK investor portfolios. But in 2025, cracks are starting to appear. Market concentration is at record highs, valuations are stretched, and performance no longer leaves the rest of the world in the dust. The question now is whether the golden era for US equities is ending, or if this is just another pause before the next surge. The long-held belief in “American exceptionalism” is under pressure. The S&P 500’s year-to-date gain of 8.61% as of 7th August 2025 looks respectable, but the FTSE All-Share has done better at 10.91%. The MSCI World Index is up 8.2% and the FTSE All-World 9.1%. US stocks are no longer the clear performance leader they were in recent years. Some analysts argue that UK investors have become over-exposed to US equities. Since the global financial crisis, the proportion of UK funds invested domestically has plunged from 29.6% in 2008 to just 11.5% in 2023, while overseas holdings have risen from 28.1% to 42%, most of it flowing into US markets. Pension funds show the same pattern. Defined Contribution schemes for younger savers now put only 7% into UK equities compared to 76% overseas, the bulk in US equities. A generation ago, it was common for half a portfolio to be invested at home.

The concentration problem in US equities

One of the biggest concerns for investors in US equities is the extreme concentration at the top of the market. The S&P 500’s largest ten companies now make up around 40% of its value, a level not seen since the dot-com bubble. The “Magnificent Seven” (Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, Tesla) alone account for more than 30% of the index, and in recent years have delivered over half of its total annual return. Nearly 70% of the S&P 500’s economic profit now comes from its top ten companies. This undermines the idea that the S&P 500 offers broad diversification and increases vulnerability if one or more of these tech giants stumble.

Historical lessons on US equities

UK investors’ relationship with US stocks is shaped by decades of change. After World War II, capital controls kept US exposure minimal. When they were lifted in 1979, pent-up demand for international diversification was unleashed. The 1990s tech boom proved pivotal. Between 1991 and 1997, UK pension funds were underweight North America by 29 percentage points, costing them about 3% a year in returns as US equities outperformed other developed markets by more than ten points. Warren Buffett has long made his stance clear. In his 2024 letter to Berkshire Hathaway shareholders he wrote: “I have depended on the success of American businesses and I will continue to do so.” He points to strong legal protections, an innovation-driven economy, and deep, liquid markets as enduring advantages.

US equities: performance still delivers

The numbers remain impressive. Over the past decade, £100 in British shares doubled; in US equities it more than tripled. Over 20 years, the US has outperformed the UK two-to-one. Without dividends, the FTSE 100 rose 70%, while the S&P 500 surged over 400%. From April 2000 to May 2025, the S&P 500 delivered 6.80% compound annual growth compared to 3.51% for the FTSE 100, with a better risk-adjusted return (0.41 Sharpe ratio vs 0.20). However, the UK market is highly correlated with US equities, especially since 2007. Large moves in the S&P 500 often ripple through the FTSE 100 and FTSE All-Share index, limiting the diversification benefits.

The investment divide on US equities

Commentators are split on where US equities go from here. The bull case: BlackRock is overweight US equities on the back of strong earnings, AI-driven innovation, and higher profitability than other developed markets. JPMorgan expects $500 billion in net inflows this year. Vanguard sees potential from productivity gains and sector rotation, despite high valuations. The bear case: Barry Bannister of Stifel predicts a 10–15% correction, citing stretched valuations and slowing growth. BCA Research warns of a 27% drop. 

Currency and correlation factors in US equities

Currency can influence returns from US stocks, but perhaps less than many think. Albion Strategic Consulting finds no consistent long-term link between US dollar movements and global equity returns over the past 50 years. Even so, the dollar’s dominance in global trade means shifts in its value can impact UK companies with significant US revenue, whether investors hedge currency risk or not.

A practical framework for US equities allocation

For UK investors, the approach should be balanced:

• Maintain strategic exposure: US equities still offer growth opportunities that the UK market lacks, particularly in technology.
• Look beyond the Magnificent Seven: Smaller US companies, different sectors, or value strategies can broaden exposure.
• Manage risks: Diversify across geographies, sectors, and asset classes to limit exposure to valuation and concentration risks.

Following an evidence-based investing approach can help you stay disciplined and focused on long-term outcomes. And remember, diversified investing should be part of a balanced, holistic financial plan that reflects your goals, time horizon, and appetite for risk. 

Conclusion: the role of US equities in UK portfolios

The shift by UK investors towards US stocks has been dramatic and, so far, rewarding. The fundamentals — global dominance, structural strengths, and historical resilience — remain. But today’s market environment demands greater caution. Concentration risk is real, valuations are high, and the UK market moves closely in step with US equities. The best strategy is not to abandon US equities or to embrace them blindly, but to hold them strategically, diversify within them, and manage risk. Warren Buffett’s career shows that while markets evolve, the principles of patience, diversification, and discipline never go out of style.

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