Is it still worth investing in American stocks?

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Sam Benstead is joined by Felix Wintle, manager of the VT Tyndall North American fund, to discuss the outlook for American shares.

With American shares briefly “correcting” 10% this year, they speak about a range of themes, including the trade war, valuations, opportunities in tech and AI, as well as the economic outlook for America.

Wintle shares his best investment ideas, and explains why he avoids all the Magnificent Seven bar one company. 

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Sam Benstead is fixed income lead at interactive investor: Hello. I’m Sam Benstead from interactive investor. Kyle is out of office this week, so I’m stepping in to host our On the Money podcast, which is a weekly look at how to get the best out of your savings and investments. Today, it’s all about US equities. The American stock market has been a juggernaut over the past decade, and driven by growth at its largest technology companies, it now accounts for a little over 70% of a typical developed world global equity index.

While profits have grown, valuations have also become more expensive, which has left many questioning whether the US equity boom is sustainable. It’s an especially important question right now with Donald Trump introducing tariffs on key trading partners and US shares dropping in value this year. To help answer these questions, I’m joined by Felix Wintle, manager of the Tyndall North American fund. Felix, thanks very much for coming on to the podcast.

Felix Wintle, manager of the Tyndall North American fund: Hi, Sam. Thanks very much for having me.

Sam Benstead: So, it’s been a tricky few months for the US stock market. How much of that is down to political uncertainty with Donald Trump back in the White House?

Felix Wintle: I think it’s a very large part of it. I think the market’s really been contending with a real unknown around tariffs, obviously. But also, there’s some real concern around the impacts of DOGE, which is the effort to control government spending and cut costs from the government side, and what that’s going to mean for GDP.

So, I think the market’s gone from a sort of honeymoon period post the Trump election where people are excited about reforms, basically, which I think were much needed. And now we’re looking at OK, well, the actions that Trump is going to take will have consequences for the economy, i.e., there's going to be less government spending, which affects GDP, and an increase in unemployment because he’s already [made] some quite sweeping employment cuts, particularly at the federal level.

So, I think we’re going through a period where the market’s trying to work out what does that actually mean for GDP growth. It means slower GDP growth and that’s been reflected in the equities.

Sam Benstead: Slow growth but a recession, is that possible in the US?

Felix Wintle: Very unlikely in my view. Don’t forget that the American economy is still growing at a very healthy clip and the trend is typically 3%, we’re around about 2.5%. But add in inflation, you’ve got nominal growth of around 5.5% to even 6%. So, depending on your forecast for inflation, we can talk about that a bit later perhaps, but you’re looking at a nominal growth of around sort of 5.5%. So, that’s very, very strong. And to actually get into negative territory even on a short-term basis, I think is pretty unlikely.

Sam Benstead: So, political risk, is clearly a factor there. But what about valuations? We saw particularly the Magnificent Seven US tech shares becoming quite expensive over the past few years, and a little bit of that has been unwound. So, has this sell-off been linked to people just thinking that, actually, the US got a bit expensive, time to take some money out, you know, valuations were a little bit much to us?

Felix Wintle: Yeah. I think there’s definitely an element of that at play, certainly. For me, the bigger question is not so much valuation on its own. Typically, equity markets can handle higher valuations if the growth is there, so, equity markets really thrive, perform well when there is growth and it’s accelerating.

And what we’re seeing with the top of the market with the Mag Seven is that for almost all of those names, you’re actually seeing a rate of change, deceleration in the growth rate. That’s typically when Mag Seven stocks, or any growth stock for that matter, tends to underperform. And it’s funny, it’s easy to think of Mag Seven [stocks] as, oh, they’ve been such heroic [shares] - and they have been great, I mean, have performed well - but they do go through periods of significant underperformance, or bad performance, and 2022 was the last time that happened. Don’t forget, the S&P was down I think about 28% in 2022, certainly in the mid-twenties.

And that’s a pretty serious correction. Tesla Inc (NASDAQ:TSLA) was down, I think, 75% that year. Google [Alphabet Inc Class A (NASDAQ:GOOGL)] was down 50%. So, it’s not like they are impervious to changes in the growth outlook, and I think that’s what you’re seeing now.

And it’s interesting when we talk about tech, again, a very much beloved sector, and it’s been great, but when you look at it, it actually peaked in relative performance terms against the S&P 500 back in the summer, back in June. So, tech has sort of quietly been underperforming the market for, what is that, nine months already? So, as you add into that the decelerating growth picture for these companies, I don’t think the Mag Seven is really going to be the leadership group from here. And it’s as I say, it’s already not been leadership for around nine months.

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Sam Benstead: And of those seven names, or big tech stocks more generally, are there any that you own in your portfolio or, you know, any that you think could look quite attractive given that pullback in valuations?

Felix Wintle: Yeah. So, we only own one. We own Amazon.com Inc (NASDAQ:AMZN), and we have owned all of them at various different times. NVIDIA Corp (NASDAQ:NVDA), obviously, is one that we owned, but we have been selling out of that and are now completely out of that over the last two to three months. The interesting about Nvidia is that it’s quite different from the other Mag Seven stocks because it really is a purely product story.

And it’s a product story in the most cyclical part of tech, which itself is a cyclical sector. So, it obviously sells semiconductors, super-high end, we probably all understand the story. But still, it is a cycle and it’s great when you’re in huge demand, which Nvidia chips obviously have been. But things like DeepSeek, I think, do change the picture. And that notwithstanding, you’ll always have a cycle. And what I mean by that is when you get to the point where supply starts to be more in balance with demand, then these stocks can really dramatically underperform.

So, I think you’ve got to be really careful with a stock like Nvidia that you don’t hang on too long and get the down cycle as well as the up cycle. So, that’s just a bit of a tangent. But just in terms of remembering that all these Mag Seven stocks, although we tend to talk about them as a group, they are wildly different businesses underneath the surface. Amazon, we’ve retained and we’d look to add to the others. For me, it’s not so much about the actual absolute valuation level, it’s more about the growth rate and, really, the rate of change of the growth rate. That’s what would get us back into these stocks, and we don’t see that occurring in the near term right now.

Sam Benstead: So the S&P went into correction briefly, a 10% drop. Do you think this is the bottom of this blip? Or, actually, could we be heading into a bear market where shares, US shares in dollar terms, drop about 20% or more?

Felix Wintle: Well, I think that’s probably unlikely. What’s really interesting is the speed of the correction. As you rightly say, it’s 10% practically in a straight line, which in and of itself is unusual. Markets tend to obviously oscillate up and down, but the trend has been quite markedly negative in the last five, six weeks. And I think it’s actually the fifth-quickest 10% correction since 1950.

So, that’s a very long time, obviously. That to me is notable, and I think it’s been that dramatic because of the reasons we discussed around complete uncertainty about what Trump’s policies actually mean in the short term. I think what he’s doing is absolutely right for the American economy. So, longer term, I think a fiscal clearing of houses absolutely needed to happen, and it’s happening. So, that’s really, really positive.

To answer your questions specifically, one never knows if it could turn into 20%. I think I’d say that that’s unlikely because these things tend to get priced in so quickly. And that’s really what you've seen with this sharp, sharp drop is a pricing in very, very quickly of uncertainty. So, we look at the market not just in terms of looking at the fundamental stories of stocks, but we also use a top-down macro process, which helps us identify turning points in the cycle. It’s a quantitative model, so just numbers, and it really just tracks the rate of change of growth and the rate of change of inflation.

And what that model is saying is that we’re probably still going to have a bit of a growth deceleration in Q2. But past that, we should inflect higher again. And that will be starting, well, basically, as soon as Q3 starts. So, we’re still quite cautious near term, by that, I mean a quarter, and we’ll be ramping back up in portfolio beta terms in Q3.

Sam Benstead: Trump’s tariffs; how do you see those playing out for different types of businesses? Who are the winners and possible losers here?

Felix Wintle: Yeah. It’s interesting, isn’t it? It’s quite hard to tell, really. Not least because he keeps on changing what he’s gonna do and the extent, and we just had some news over the weekend about perhaps they’re going to be less bad. So, I think there’s certain sectors which are clearly going to be affected. As for actual winners, the problem with tariffs is it is quite a regressive step.

One of the interesting ways we’ve been talking about it with clients is that everyone assumes that tariffs are going to be inflationary. Obviously that makes a lot of sense because you’re making goods more expensive. But, actually, there’s a deflationary, or disinflationary, angle to it too, in that if you’re going to slap a 20% tariff [on], well, maybe I’ll go and buy whatever I want to buy from somewhere else. And the market is very quick at adapting and changing, so is it actually disinflationary?

One of the interesting things about inflation is that I think most people can see it’s likely to be higher for longer, and we wouldn’t necessarily disagree with that. But also don’t forget CPI peaked in January at 3%. So, 3% is pretty low. I mean, the target is 2%, but it wasn’t that long ago that there were 9% inflation. So, it’s already at 3%. And, actually, the last reading was 2.8%. And our forecast reckons it will be 2.4% when they report in a couple of weeks’ time. So, you’re actually already seeing a disinflationary reality despite all the headlines around tariffs.

So, it’s quite difficult to be explicit about winners and losers because there’s so much going on there. We’re not even sure whether they’re going to be inflationary or disinflationary or, possibly, they’re both. At the first instance, inflationary and then disinflationary. So, it’s quite a complicated picture. But we’re not trying to go out there and [say, right,] who’s going to win from the tariffs, but obviously [we’re] very mindful of the effect the tariffs are going to have.

Sam Benstead: So, you split the fund into core ideas and tactical investments. On the tactical side, where are you finding opportunities today?

Felix Wintle: On the tactical side, in the last couple of months, we’ve got a bit more defensive. So, what that means is selling some of our slightly racier stocks, so things in tech and in consumer discretionary, and picked up slightly more defensive shares. So, things like AT&T Inc (NYSE:T), the telco company, and T-Mobile US Inc (NASDAQ:TMUS), [and] they’re actually both in quite a good spot fundamentally as well, in that they’re taking share from Verizon Communications Inc (NYSE:VZ), which is the third player. But they’re much lower beta. That’s what I mean by defensive.

In markets like we have just had, it’s really important, in my view, to lower the beta of the fund, so you don’t get caught out or lose a lot of upside that you might have had. And you look at stocks, so Tesla was another example of a stock that we owned, but sold, because it’s one of the highest beta stocks in the market. So, anyway, that’s an example.

But on the longer-term side, one share we’ve been picking up recently is Take-Two Interactive Software Inc (NASDAQ:TTWO), which is interesting because it is the owner of Rockstar Games, which makes Grand Theft Auto and that’s going to launch Grand Theft Auto VI in November this year and that’s interesting because Grand Theft Auto, the game, is the most valuable entertainment IP that there is, that’s ever been sold. So, it’s a big event.

The last launched Grand Theft Auto V was 10 years ago. So, a much anticipated event and that’s a stock that we think is really interesting. It’s held up very well in this recent volatility and they typically do have a really good run into the launch of this game. So, quite excited about that as an example of something we picked up more recently.

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Sam Benstead: And on the core ideas side, is this a bit of the portfolio that you don’t really change too much? And are there some companies that you’ve held for a really long time in there?

Felix Wintle: Yeah.That’s the whole idea of the core. Longer-term ideas that we can leave and have compound for us. So, an example of that would be Axon Enterprise Inc (NASDAQ:AXON). Axon makes Tasers, the non-lethal device used by police forces around the world. It’s one of those companies where it used to be called Taser International, but they changed it into Axon. Everyone knows what a Taser is, right? But the global penetration of the product is actually really quite low. So, it’s an interesting dynamic there. They also make body cams. The really interesting part of the story for me is the fact that most of their sales are still in America. But what you have today, which is even more important these days, is a body cam which will record an arrest, for example. But then they have the AI software backing it up. So, that’ll automatically write the report of what’s happened as per the footage from the body cam.

So, not only does that save time, they reckon it saves police officers four hours a day not writing reports, but there’s an accuracy element as well. So, that’s a really great product which police forces now in America, and also much more globally, really want to have.

And from an investor’s point of view, it’s great because you’re moving from a company with a profit margin around hardware into a profit margin around software. And software, you’re getting a 20-point margin uplift from sort of 40 to 60 in round terms on that, so that helps the stock work. So, that’s a good example of a company which we anticipate holding for the long term. We’ve owned it for about two and a half years and expect it to continue to perform well as it takes its products to a global audience.

Sam Benstead: So, that’s a big success story of AI that goes beyond just just buying chips and investing in the cloud. Are there any other examples where companies are actually embracing AI and using it effectively to grow the business?

Felix Wintle: It’s a very interesting question because there aren’t that many. Lots of companies talk about it. I mean, everybody talks about it. AI this, AI that. But, actually, real useful products that you can monetize at scale are still pretty few and far between. If you think about Copilot, the Microsoft AI agent in effect, it isn't very good, doesn't really monetize. Obviously, the promise of AI is absolutely huge.

I think some areas like healthcare...this is happening now...[but] it’s hard to access in terms of investing, but if you could run all the clinical trials that have ever been done through AI and figure out some kind of utility that hasn’t been tried, that’s a huge optimisation of existing data, which would almost certainly throw up some really interesting possibilities in terms of therapy development.

I think obviously there’s lots of other use cases for AI, but to your point, actual monetization of it today isn’t really there. I think Axon’s a very good example of something that’s tangible, usable, works, and is also monetizable.

Sam Benstead: You own about 30 companies in this fund. Have you been using the sell-off to add new shares or to invest more in companies that are suffering a bit right now?

Felix Wintle: Well, we’ve made a new addition to the fund literally in the last week or two. But, yes, we’ve added to Spotify Technology SA (XETRA:639), which again is a really interesting story that we like because it’s a bit like Netflix Inc (NASDAQ:NFLX), which we’ve also been adding to.

When you have a downturn or a correction like we’ve had and there’s a lot of uncertainty, consumer discretionary-type businesses tend to get it in the neck a bit because people think everyone’s going to stop spending. To a certain extent, that can be true and particularly if we’ve got a slightly more challenged economic picture in the near term.

But the view very much around Netflix and, now Spotify, is that here are two businesses where people, the stickiness of the user base, is incredibly high. People tend not to churn away. People tend to churn away from other subscription services, but Netflix, again, there is competition there, particularly in America, you have other entertainment subscription services. But Netflix is the one that [for] everybody is definitely the last to go, if it goes at all. Spotify has also proved to be a service that people want to really have. So, that’s been an area that we’ve wanted to add to on weakness.

Where else have we been adding? There’s some new positions in insurance as well. That’s been a part of financials that has been performing well. The whole financials sector has been performing well, and that’s really a lot around rates and the steepening yield curve. So, we’ve been taking advantage of that as well.

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Sam Benstead: And Trump is placed to support US businesses, potentially through reduced corporation taxes. Is that something on your radar, the positive impact of Trump in office? So, outside tariffs and the uncertainty around that, there are actually sectors that could really benefit from him and his traditionally pro-business stance.

Felix Wintle: Yeah, I think so. It’s very much America First, and that has meant tariffs, but it also, as you rightly say, does mean tax cuts, and it means tax cuts at the corporate level. But also let’s be careful about how we talk about it. It’s not really tax cuts, it’s an extension of existing tax cuts. So, it’s not new cuts. But in effect, I think that’s right. And there’s an individual level taxation, income tax cuts, which are going to get extended as well. So, yeah, I think that’s a very positive message and he’s basically using the tariffs to try and pay for the extension of those cuts. I think it’s a positive step for America both corporately and for the consumer.

And there’s a real effort to get the industrial base back onshore. This reshoring, we hear about it quite a lot in terms of the semiconductor industry building factories called ‘fabs’, factories that make chips, based in Arizona, based in Nevada. And that does generate a lot of employment. It’s obviously also a strategic imperative now that they want to get out of Taiwan and other areas and have it all homegrown. But, again, that’s a real benefit to the domestic economy, and that’s something that Trump really supports, and I think that’s a big positive for him.

Sam Benstead: My thanks to Felix, and thank you for listening to this episode of On the Money. If you enjoyed it, please follow the show in your podcast app and do tell a friend about it. If you get a chance, leave us a review or rating in your podcast app too. You can join the conversation, ask questions to tell us what you'd like us to talk about via email on OTM@ii.co.uk. And in the meantime, you can find more information and practical pointers on how to get the most out of your savings and investments on the interactive investor website at ii.co.uk. We'll see you next week.

On The Money is an interactive investor (ii) podcast.