What's next for US equity markets?

US President Donald Trump’s imposition of tariffs and his refusal to dismiss the possibility of a recession have unsettled investors. The near-term outlook has undoubtedly become more uncertain, fuelling an aggressive sell-off in US equities. The biggest casualties have been mega-cap tech stocks, which have seen heavy selling pressure following a period of exceptional performance which left them vulnerable to a change in sentiment.

In this piece, we ask Cormac Weldon and Chris Kent, managers of the Artemis US Select strategy, for their views on recent events and how they are impacting portfolio construction:

Has your outlook for US equities changed?

The outlook has certainly become more uncertain, as it has become clear that President Trump is willing to let equity markets and the broader economy endure some short-term pain while he pursues his radical agenda. It is not our central expectation that the US will enter a recession, but the likelihood has increased because of trade policy risks. The economy continues to benefit from strong productivity, real expansion in household income and potential pro-growth policies.

Nevertheless, the impact of tariffs is expected to be significant. The average US tariff rate is now projected to rise by 10 percentage points. These measures will weigh on growth through higher consumer prices, tighter financial conditions, and delayed business investment. With weaker growth projections, the Fed is still expected to cut rates twice in 2025, in June and December.

While recession risks have increased, it is difficult to predict the direction that President Trump will take. Will market forces check his actions? Will declining popularity influence his decisions? Much remains unknown. However, at the time of writing, the economy is not in poor condition, though there are increased risks on the horizon, and we will proceed accordingly.

Have you made any changes to the portfolio as a result?

Yes. Recognising that the economy is likely to grow at a slower pace due to high levels of uncertainty, we have increased holdings in defensive equities and cut exposure to companies more vulnerable to an economic slowdown.

In the first category, we have increased investments in Allstate (home and auto insurance), Zoetis (animal health), Intuitive Surgical (healthcare robotics), Pacific Gas and Electric (Californian utility) and discount retailer Burlington Stores.

We have reduced some of our infrastructure and housing-related exposure given their economic sensitivity and uncertainty about government-funded spending on infrastructure. We sold a relatively new position in Herc as the company had added significant debt to its balance sheet after acquiring a smaller competitor.

Given the more volatile backdrop, we also trimmed positions in Eagle Materials, Vulcan and Saia. In the housing sector, we reduced our holding in Builders FirstSource. Furthermore, we cut exposure to cyclical consumer stocks by reducing our holdings in Flutter and Somnigroup International.

On the defensive side, we bought a holding in Coca-Cola, NiSource (utility), Moody’s (debt rating agency) and Thermo Fisher (life sciences). The latter two stocks were purchased after they had de-rated somewhat, resulting in better risk awards and a higher-than-average degree of stability.

Is the market volatility creating opportunities?

There are parts of the portfolio where share prices have fallen significantly, presenting compelling risk-reward opportunities. We are evaluating whether our upside potential remains viable and have increased positions where appropriate.

We are carrying slightly higher cash than normal at approximately 4%, giving us the flexibility to seize opportunities as they arise. While we acknowledge heightened short-term uncertainty, we believe that, eventually, the administration's economic experiments will yield positive results.

During periods of high macro uncertainty, our focus on higher-quality companies offers little short-term protection. The market tends to be highly sceptical of all companies' prospects, treating even those with strong fundamentals harshly. But, over time, such companies will demonstrate their strengths.

Is it over for the Magnificent 7?

Over the past few years, markets have been driven by a handful of ‘megacap’ stocks that have been generating impressive cash flows, buoyed by the belief that they would be the ‘winners’ of the race to develop and benefit from AI.

More recently, the market has grown impatient with the timeline of the big ‘payoff’ on the massive investment in AI infrastructure made by these companies. Instead, investors have focused on the fact that huge capital expenditure is not traditionally good for forward returns.

The Mag 7 are not a homogenous group. Let’s first focus on the hyperscalers – Meta, Amazon, Google, Microsoft – as they are spending the most. We have an overweight position in Meta, paired against an underweight in Alphabet. We think the latter is likely to come under pressure from Meta, whose integration of AI within its ad business has been extremely accretive. We are overweight Amazon, as we believe there is an opportunity both in the online business and AWS (cloud). We are underweight Microsoft because of concerns about capex.

The other three are all very different businesses. Our largest underweight is Apple, where there are a number of issues. Apple has a very complex supply chain which is heavily reliant on China, putting it at risk in a potential tit-for-tat tariff exchange between the US and China. For Nvidia, our estimates are ahead of consensus for 2026 earnings, mainly due to the anticipated ramp-up of the new Blackwell chips. Lastly, Tesla is a challenging business to analyse; it's an auto business currently performing poorly, yet its other areas, such as full self-driving and potentially robotics, could propel the stock far higher. For now, we remain underweight.

Overall, we hope this shows that, while the market often views these names collectively, the drivers and outlooks for each are very different.