US firms could make portfolios great again

The stock market stars of the year have been the Magnificent Seven, a group of technological titans made up of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

This proof that supporting American innovation and resilience tends to pay off has sparked a search for companies in other fields, based in the heart of the country and poised to thrive thanks to a green industrial revolution.

Because despite higher interest rates and recession anxiety, the Midwest is still getting its act together, and these conditions could provide diversification opportunities. Recession fears will persist, given the delayed effect of interest rate increases. But these concerns are tempered by the belief that the United States should be less affected than Europe or the United Kingdom.

David Harrison, manager of the Rathbone Global Sustainability fund, said: “There are companies striving – for lack of another phrase – to ‘make America great again’, exploiting the industrial policies introduced by President Biden, a Democrat.”

The Inflation Reduction Act, passed in 2022, aims to accelerate the United States’ energy transition. The legislation is driving billions of investments in manufacturing. It is also encouraging companies to move jobs from the Far East and other regions, creating jobs in the United States. There seems to be less suspicion surrounding initiatives that could be described as “woke” if they stimulate long-term, labor-intensive projects.

Another landmark law, the Infrastructure Jobs and Investment Act, seeks to improve bridges, roads and other parts of America’s often deteriorating infrastructure. The average water pipe is 100 years old and probably leaks.

Goldman Sachs maintains that, despite awakening contrary sentiment in some circles, there will be “increased business and consumer interest” in projects arising from the Inflation Reduction Act.

As a result, the policy could inspire $3.3 trillion in spending over the next decade. But, as Brian Singer, an analyst at Goldman Sachs, argues: “Its benefits for green companies are not necessarily taken into account.”

Bank of America notes that companies likely to be boosted by the Inflation Reduction Act operate in a wide range of sectors, including agriculture, energy storage and batteries, renewable energy, and construction. They include familiar names such as heavy excavation equipment maker Caterpillar, General Electric and Honeywell, as well as lesser-known companies such as Bloom Energy and Teledyne.

As water scarcity becomes an issue, more data centers are emerging. These centers are responding to the increase in digitalization derived from the rush to integrate more generative AI (artificial intelligence) into company systems.

Each needs large amounts of water for their cooling systems, and as Harrison points out, this means more requests for services from companies like Hilliard, Ohio-based Advanced Drainage System. This company installs drains made from recycled plastics. Two other specialty water companies have the potential to thrive: Xylem, the $22.9 billion industry powerhouse, and Badger Meters, based in Milwaukee, Wisconsin.

The focus on the impact of the Inflation Reduction and Infrastructure Investment Acts has coincided with a reassessment of the outlook for the S&P 500 index among some of Wall Street’s influential forecasters. Since the beginning of the year, the index has risen 16 percent to 4,432. Some strategists who predicted the index would end the year as low as 3,800 now argue it could rise as high as 4,750.

This change of heart suggests it may be worth checking your exposure to the United States. You may be more biased toward Silicon Valley than Central America if you have cash in certain global funds. The F&C trust’s biggest holdings are Microsoft, Apple, Alphabet and Nvidia, whose shares have risen 203 percent this year.

Shares of online retailer extraordinaire Amazon have risen 54 percent over the same period. The enthusiasm for the potential of generative AI suggests that the Magnificent Seven still deserves a place in your portfolio. But the price of Home Depot, whose 2,000 stores supply the means to renovate American properties, is down 3 percent this year, although most analysts consider it a buy.

At the same time, you may already own shares in UK companies that will play a key role in US megaprojects.

Dzmitry Lipski, a fund analyst at Interactive Investor, suggests the Artemis US Smaller Companies fund, with its infrastructure and renewable energy themes, as a route into Central America.

Two years ago, American billionaire money manager Warren Buffett said that “you should never bet against the United States.” I follow this advice because, at the age of 93, Buffett has had time to test his thesis.