Can anything stand in the way of the US stock market rally?

The stock market rally is on pause on Tuesday. There have been some chunky losses for European stocks, and even US stocks have seen their gains slow. The S&P 500 is still expected to remain above 6,000, which is a sign that any sell-off on Tuesday may be mild and short-lived.

US stocks had their best week of the year last week, and fund managers are extremely bullish on the outlook for US stocks. The most recent Bank of America Fund Manager survey found that the number of fund managers who had gone overweight US equities had tripled in the week after Trump won the election and reached an 11-year high.

Fund managers are only one section of the equity market; however, their ideas usually filter down the rest of the trading pipeline. The question for traders is 1, will US dominance continue, and 2, will all US sectors rally in unison, or will some sectors outperform?

Will US dominance continue?

We think yes. There are three reasons for this: growth, earnings and momentum. The US is expected to grow at a faster rate than Europe and the UK in the coming years. The IMF’s US growth forecast for 2025 is 2.2%, in Europe and the UK it is 1.2%. Thus, the US is expected to grow at nearly double the rate of European economies, which adds to its exceptionalism and the attractiveness of its stock market over European markets.

Earnings growth is also in the US’s favour. 456 out of 500 companies on the S&P 500 have reported earnings for Q3. So far, across all sectors, sales growth has beaten expectations by 1.4%, while earnings growth has seen a positive surprise to the tune of 7%. This has been led by energy, consumer discretionary, communications and tech. This compares to Europe. For the Eurostoxx 50 index, 39 out of 50 companies have reported earnings for Q3. The sales surprise for all sectors is -1.2%, while the earnings surprise is -0.6%. Thus, European shares have underperformed expectations, while US stocks have outperformed expectations when it comes to earnings. This adds to the attractiveness of the US stock market.

Momentum is also important. It feels like US stocks have such an advantage over European stocks that they may not be able to play catch up. As you can see below, US stocks definitely have a performance advantage vs. their European peers.

S&P 500, Eurostoxx index and FTSE 100

Source: XTB and Bloomberg

Will all US stocks benefit from the Trump trade?

We doubt that this will happen for a few reasons. The largest companies will be better protected from inflation risks and get more benefit from the tax changes. Also, larger firms might be able to petition Trump to lessen the impact of tariffs, but smaller and medium-sized companies may not.

The Trump trade is also favourable to the tech sector. Stocks like Tesla continued to rally sharply on Monday and was higher by another 8%. Over the last 5 days, Tesla and Palantir are the best-performing stocks on the S&P 500, and both are higher by more than 40%. They are both leveraged to Donald Trump: Tesla through Elon Musk’s close relationship with Trump and Palantir through its tech contracts with the US military and the Pentagon.

The Magnificent 7 continues to outperform the S&P 500, and the equal-weighted S&P 500, which strips out the effect of the largest companies in the index. This suggests that tech is till king of the US stock markets, and the gap between tech and the rest of the US index has grown since Trump’s election win, as you can see in the chart below.

S&P 500, Magnificent 7 and SPW index

Source: XTB and Bloomberg