After two years of strong returns, banks continue to tout the US as the equity market of choice with American exceptionalism widely cited as a key driver.

The global environment is littered with uncertainty. Economic growth is structurally slowing down. Monetary policy is diverging between major central banks. Geopolitical tensions are on the rise.

However, there is one bright spot for investors that is widely agreed on amongst banks: a continued rally in US equities.

194-Year Old Idea

The concept of US exceptionalism was first conceived by French political scientist and historian Alexis de Tocqueville after his travels to the country in 1831 led him to write his most well-known work, «Democracy in America», calling the position of its people exceptional. Nearly two centuries later, banks continue to refer to this idea as one of the reasons for continued confidence in US growth and its equity market.

«[N]ever bet against America,» advised DBS chief investment officer Hou Wey Fook. «Besides the breadth and the depth of liquidity in American capital markets, there is a culture of risk-taking, creativity, entrepreneurship that permeates this ecosystem alongside world-renowned universities that really engage in cutting-edge R&D. On top of that, there is a diverse talent pool that is present in the US.»

«We are positioned for another year of US exceptionalism,» said Standard Chartered in an investment note.

Market Upside

On the upside for the market, most banks are forecasting high single-digit to low double-digit returns compared to current levels. Deutsche Bank has set a target of 6,500 for the S&P 500 while UBS expects the index to hit 6,600.

Although technology is the most widely preferred sector primarily due to the artificial intelligence boom, other areas are also driving interest. Julius Baer, for example, is positive on cyclicals such as industrials, US financials and quality mid-caps.

Inflation Risk

While the US equity market is a near-consensus investment play amongst banks, some remain cautious in the longer term due to inflation risk. There are concerns that inflation, especially due to Donald Trump’s immigration policies, could influence interest rates and the relative attractiveness of US equities when the 10-year US Treasury (UST) yield reaches around 5 percent.

«US equities may outperform on higher earnings. But over the next four years, fewer Fed rate cuts and higher UST yields may threaten the US outlook later,» said Bank of Singapore in an investment note.

«I don't think there's enough focus on what [Trump is] going to do on immigration. You could see another million people not entering the workforce from here in an already tight job market,» underlined UBP group chief strategist Norman Villamin. «What does that do? Create inflationary pressure on wages.»