Your stock market needs YOU – with US stocks hitting record highs, should you buy these British bargains?

These are good times for stock markets on both sides of the Atlantic, but the United States is far ahead.

In the United Kingdom, the FTSE 100 index of blue-chip shares has been trading near its all-time high and is up almost 8 percent so far this year. On the other side of the pond, the advances are even more spectacular.

The S&P 500 is up 23 percent, having reached new highs in 44 trading days already in 2024, one of the highest figures on record. And the gap between the returns of the UK and US markets is growing.

The FTSE 100 has recorded a 17 per cent gain in five years, but the S&P has fared much better, almost doubling its value in that time.

If dividends paid by companies were reinvested, the FTSE 100 would return a total annual return of 6 per cent over the past decade, according to a recent report by investment bank Goldman Sachs. That compares with 13 percent for the S&P 500.

Part of the difference can be explained by weak corporate earnings in the United Kingdom, along with domestic political upheaval following the Brexit vote, Goldman said.

The Wall Street giant’s analysts also mentioned that, unlike the US, the London stock exchanges do not have a large technology sector.

Technology stocks have been behind much of the performance in the United States. However, much of this is because British investors, including pension funds, have simply avoided London-listed stocks, driving down their market valuations.

In fact, foreign investors own around two-thirds of the UK stock market.

Goldman notes that the only net buyers of UK shares in recent years have been companies buying back their own shares.

Traditionally, private investors in the UK have tended to invest most of their savings in companies listed on the London Stock Exchange, mainly because it is simpler and there is no risk of currencies moving against them. .

Many also want to support British businesses that create jobs and prosperity here.

But, given the growing valuation gap between the US and the UK, it wouldn’t be surprising if even the most patriotic British savers looked enviously at their American cousins ​​and sought a piece of the action.

“The returns can be significant for investors able to look beyond their home bias,” says Richard Flynn, UK managing director at Charles Schwab, the largest US brokerage.

Critics of the US stock market boom say it is highly concentrated in a few technology stocks.

That makes returns more volatile and raises the chances of a broader decline if investor sentiment turns against Silicon Valley companies like chip giant Nvidia or sectors like artificial intelligence (AI).

The frenzy over technology in general – and Nvidia in particular – has inflated what some see as the biggest bubble in stock market history.

“More than $10 trillion of value has been created in the stock market since the AI ​​hype began,” according to The Kobeissi Letter, an investment guide.

To put this in context, Nvidia is worth $3.4 trillion (£2.6 trillion) – almost 12 per cent of the entire annual output of the US economy – and is about to overtake the iPhone maker, Apple, as the largest listed company in the world.

However, reports that the U.S. government could limit the number of chips that can be shipped to certain countries temporarily stalled Nvidia’s advance last week, a reminder that tech stocks are not for the faint-hearted. But American stocks are much more than just technology stocks.

Russ Mold, chief investment officer at brokerage AJ Bell, said: “The United States is the largest economy in the world,” adding that “wealth and success are celebrated, not vilified” and that “companies are run in largely taking into account the final result and the shareholder. .

Americans also show a strong interest in managing their own investments and there is a much stronger culture of individual share ownership than in the UK.

A similar process is taking place here. But experts warn that raising capital gains tax on share sales in next week’s Budget – or removing inheritance tax exemptions for shares in the junior AIM market – will do little to revitalize the market. from London.

Think tank New Financial found that more than 600 British companies have disappeared from the UK stock market in the last 20 years, for a variety of reasons.

But the United States has other significant advantages that its rivals cannot hope to emulate. And in addition to having the largest stock market in the world, the United States is also home to the largest bond market.

The dollar remains the world’s reserve currency. Then there is the economy. Even though there was talk of a recession in the summer, it is still growing at more than 3 percent.

‘What don’t you like?’ asks the AJ Bell cast. Perhaps the biggest risk is that the undoubted merits of the US markets are already known and “considered” at inflated valuations. In simple terms, the problem is that US stock prices are high relative to expected future earnings flows, meaning there is less chance of them continuing to rise and more chance of them falling.

“The last time the US stock market was so dominant in global markets was in 2000, just before the tech, media and telecom bubble burst and the tech-laden Nasdaq index plummeted. almost 80 percent,” says Mold.

He advises against succumbing to FOMO (fear of missing out) and instead sticking to an investing strategy that fits your overall goals. Does that mean a bet on Britain could pay off? Maybe.

Mold counts the UK among those unloved markets that could be undervalued.

Goldman Sachs agrees. The bank believes the FTSE 100 will reach 8,800 within a year, 5 per cent higher than its current level.

Another sign of hope is that inflation is moderating. This gives the Bank of England room to lower interest rates twice before Christmas, says Goldman.

Low interest rates tend to be good for stock markets because they reduce the returns available on risk-free savings accounts.

There is, then, reason to be hopeful about the United Kingdom. But in the long term, investors who put a proportion of their portfolio in the United States have the opportunity to share a portion of the prosperity of the world’s largest economy.