US firms could make portfolios great again

The stock market stars of the year were the Magnificent Seven, a tech titan group consisting of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

This evidence that supporting American innovation and resilience is paying off has led to a search for companies in other fields, based in the country’s heartlands and poised to thrive through a green industrial revolution.

Because despite higher interest rates and fears of a recession, Central America is still entrepreneurial, and these conditions could provide diversification opportunities. Fears of a recession will persist, given the lagging effect of interest rate increases. But these concerns are tempered by the belief that the US should be less affected than Europe or Britain.

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

The Inflation Reduction Act, passed in 2022, aims to accelerate America’s energy transition. The legislation stimulates billions in investments in production. It also encourages companies to bring jobs from the Far East and other regions ‘onshore’, creating employment opportunities in the US. There seems to be less suspicion around initiatives that could be called ‘woke’ if they encourage long-term, labor-intensive projects.

Another landmark piece of legislation, the Infrastructure Investment and Jobs Act, aims to improve America’s bridges, roads and other parts of the country’s often dilapidated infrastructure. The average water pipe is 100 years old and is probably leaking.

Goldman Sachs claims that despite anti-woke sentiment in some quarters, there will be “greater corporate and consumer interest” in projects resulting from the Inflation Reduction Act.

As a result, the policy could generate $3.3 trillion in spending over the next decade. But, as Goldman Sachs analyst Brian Singer argues, “its benefits for green companies are not necessarily priced in.”

Bank of America notes that the companies likely to get a boost from the Inflation Reduction Act operate in a wide range of sectors, including agriculture, battery and energy storage, renewable energy and construction. These include well-known names such as heavy excavator manufacturer Caterpillar, General Electric and Honeywell, as well as lesser-known companies such as Bloom Energy and Teledyne.

As water scarcity becomes an issue, more and more data centers are springing up. These centers are responding to the wave of digitalization resulting from the rush to integrate more generative AI (artificial intelligence) into companies’ systems.

All require large amounts of water for their cooling systems, and, as Harrison notes, this means relying more heavily on the services of companies like Advanced Drainage System, based in Hilliard, Ohio. This company installs drains made from recycled plastics. Two more specialty water companies have the potential to flourish: Xylem, the $22.9 billion industry powerhouse, and Badger Meters, headquartered in Milwaukee, Wisconsin.

The focus on the impact of inflation reduction and infrastructure investment laws coincided with a reassessment of the prospects for the S&P 500 index among some of Wall Street’s influential forecasters. Since the start of the year, the index has risen 16 percent to 4,432. Some strategists who predicted the index would end the year at a level of 3,800 are now claiming it could rise to a level of 4,750.

This shift in opinion suggests it may be worth checking your exposure to the US. If you have cash in certain global funds, the price may move more towards Silicon Valley than Central America. The F&C trust’s biggest holdings are Microsoft, Apple, Alphabet – and Nvidia, whose shares have risen 203 percent this year.

Shares of Amazon, an online retailer extraordinaire, have risen 54 percent over the same period. The excitement about 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 are fueling the U.S. real estate makeover, is down 3 percent this year, even though most analysts consider it a buy.

At the same time, you may already own shares in British companies that will play a key role in American mega-projects.

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

Two years ago, billionaire American fund manager Warren Buffett said that you should ‘never bet against America’. I heed this advice as, at age 93, Buffett has had time to test his thesis.