Equities

A reality check on US market momentum

November 04, 2025 - 6 min

Paul Lacroix
Head of Products
Ossiam

Will the S&P 500’s momentum continue?

The S&P 500 had a very strong year so far this year with performance of more than 10%, and it follows also two very strong years in 2023 and 2024 with performance of more than 20%. That being said, this year has not been without volatility. We all remember in Q1, the DeepSeek Monday and the questions of investors regarding the AI valuation, but also the tariffs from Donald Trump, which led the S&P 500 to lose more than 15% in Q1. What we look at a lot at Ossiam is valuations. And for that we are using the CAPE ratio, which has been developed by Professor Schiller, which is a, a widely used ratio, especially in the US.

If we look at the CAPE ratio of the S&P 500 today, it is just below 40. 40 is the level we had during the dot-com bubble just before the crisis. So for us this should lead to some caution for investors, especially for the most overvalued sectors like technology.

What are the diversification opportunities in US equities?

The S&P 500, because of the very strong performance of a few companies, is now very concentrated. If we look at the top 10 stocks of the S&P 500, they account for more than 35% of the weight of the S&P 500. So you may think that because there are 500 companies, the S&P is very diversified, but in reality it is focused and concentrated in a few stocks and in a few sectors. To try to avoid that concentration with see investors looking for alternative solutions like equal waiting, for example, which had a lot of interest over the past couple of years. Unfortunately, so far it has not been performing well. Another solution could be a sector rotation strategy to try to invest in undervalued sectors, which could benefit from a rebound. We can think about the consumer staples or consumer discretionary, which are very attractive in terms of valuation today.

What is your outlook for European equities?

In Europe, valuations are quite attractive compared to the US especially because the performance over the past 10 years has been quite low in Europe compared to the US. That being said, there are a few sectors which are very highly valuated. We can think about the defense sector, for example, which benefited a lot from investments during the first quarter and which is compared to the rest of the market, quite expensive at the moment. Otherwise European equities, they still suffer from long-term issues. We can think about the lower growth compared to US companies. We can think about the difficulties for investing, especially for startups in Europe. A lot of European startups are going to the US to find financing. Last point is the political instability that we have in Europe, in France as well, which leads investors to be quite cautious about European equities.

Which macroeconomic factors are markets underestimating?

The main topic of conversation we have with clients all over the world is AI. Historically, all the AI companies were investing in different topics. So Google was doing web research, Apple was doing iPhone, Microsoft was doing software. Today, there are massive investments, more than 400 billion every year from those companies, but they all invest exactly in the same topic, and there will be some companies that are going to win and some that are going to lose, and that can be a very big risk for them.

The second topic, which is also quite interesting and sometimes forgotten by investors, is that so far investments have been mostly to the producers of AI such as Nvidia, for example. But if AI is truly a revolution, it will also spread to the other sectors, which will benefit a lot from productivity improvement, for example. We can think about healthcare, AI can help to design new drugs and help also the productivity for that sector.

ETFs continue to gain traction, what differentiates active and passive ETFs?

So ETF is a mutual firm, but that is listed on an exchange and can be traded during the day like a stock. There are two different kinds of ETFs. We have the passive ETFs and the active ETFs. So the passive ETF is the most common ETF. The passive denomination means that they passively replicate an index calculated by an index provider. So we can think about the S&P 500 or the MSCI World. It can also be more complex indices like equal weight or dividend indices. But all those ETFs are replicating an index, so they are considered as passive.

All the other types of ETFs are active. They can be either quantitative, so following a rule-based approach or fully discretionary in which the managers are actually selecting stocks or bonds based on their conviction.

What long-term growth drivers do you believe will shape equity markets?

One of the big trends that we have in Europe is the retail investing. We've seen it in Germany lately, but also in France. A lot of retail investors are starting to invest, especially through platforms, direct investing, and they are also using a lot of ETF. Why are they investing? Mostly to try to build capital for the future given the discussions about retirements, but also the EU is trying to help investors and help companies in Europe to get investments from those retail investors to help the economy. A second trend that we should not forget is ESG. We know that it has been quite difficult for ESG both in terms of performance, but also in terms of inflows lately. But it's not because there are not as many inflows that the risk and the issues about ESG are gone. So for long-term management it is very important to take into account those risks, in order to build efficient portfolios.

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