Lesley Marks explains that despite expensive market, there's a value play powered by 'America First' policy
It seems sometimes that every year end investors ask themselves the same question: can US equity markets sustain their leadership next year? We’re coming off two successive years of 20+ per cent returns on the S&P 500. Much of that growth has been powered by a concentrated group of mega-cap stocks with increasingly expensive price to earnings ratios. The US economy does not look set for a recession, but it does appear to be slowing somewhat. The incoming Trump administration, too, appears set to pursue some nominally inflationary policies. Investors and asset managers may be happy with what they’ve seen, but the question has to be raised once again as to whether this leadership can be sustained.
Lesley Marks believes that US equity markets will continue to lead in 2025. However, the CIO, Equities at Mackenzie Investments believes the drivers of that leadership and the companies that define it will be different from the mega-caps that typified 2023 and 2024. She explained that driven in part by preferential government policy and a rotation away from some mega-cap names, small and mid-cap US equities look poised to drive US market leadership next year.
“We believe the focus is going to be a continued broadening out of returns beyond the magnificent seven or mega-cap stocks. And we think that that those returns will extend into the S&P 493 as well as us small and mid-caps,” Marks says. “The incoming Trump administration is really domestic focused in its policy. Most of the larger-cap companies tend to be more multinational and global. We think that this America first focus by the Trump administration is going to benefit companies that are either more domestic in their operations or are willing to invest more in the United States.”
Key planks in Trump’s proposed economic policy look set to preference domestic US business over companies with global exposures, Marks explains. The proposed import tariffs are at the top of the list. While the nature and scope of those tariffs are not yet known, Marks believes that in any form they will result in an advantage for businesses with greater US orientation. Somewhat less discussed than tariffs are the proposed corporate tax cuts that Trump wants to implement. While multinationals use global tax structures to minimize their tax burden, domestic US companies have more to gain from a US corporate tax cut, which should drive greater earnings growth in these names.
Deregulation is another factor that the incoming administration seems to have made a priority. Marks says that while deregulation’s likely positive impacts on sectors like energy and banking have been made much of, she notes another factor that may benefit smaller cap names. Deregulation will likely mean the administration is more favourable to mergers and acquisitions. In M&A activity, the purchased companies tend to enjoy a better stock tailwind, which further favours the mid and small-cap names that Marks sees leading in 2025.
Historical trend data also favours strong US equity performance in 2025 — US stocks tend to do well at the start of a new administration. However, Marks says that it’s the particular policy focus of this administration that makes her think US small and mid-caps will lead.
Many of those policy planks that Marks believes could spark leadership in a broader US market segment are also potentially inflationary. However, Marks believes that any resurgence in inflation will not create another situation like we saw in 2022. While she sees a risk of some resurgent inflation, the impact of tariffs will not likely be equivalent to the supply chain disruptions we saw coming out of the pandemic.
Marks adds that while a spike in inflation would be damaging for the bond market, equity markets are capable of digesting some inflation when there is GDP growth. After a certain point equity markets get a bit of ‘indigestion,’ but with no real clarity on the exact nature of inflationary policies like tariffs Marks notes that the headwind for US equities is not yet known. In the meantime, she sees a set of US companies directly poised to benefit from Trump’s economic policies which could offer upside in the context of a diversified portfolio.
“These companies have fairly domestic focused costs, they trade at attractive valuations and they have consistent growth,” Marks says. “I also think these are companies that could be realistic targets for acquisition.”
