Fund managers and buyers are retaining their conviction in US equities for their defensive characteristics and the quality of the businesses, despite research suggesting forward valuations on some metrics have only been higher during the 2000 dotcom bubble.
Since 20 February, when the S&P 500 index reached its year-to-date peak of 7.6% at time of writing (13 May), the index has fallen 10.9%, according to data from FE fundinfo.
However, this is including a 25.7% freefall within the first four weeks of lockdown measures being first put in place.
Between 16 March and now, however, the index has bounced back by almost 20%.
According to data from Refinitiv, the US index's Shiller P/E ratio - which measures its average inflation-adjusted earnings from the previous ten years - is currently 25.9x.
A research note from Bank of America's global research team released last week (5 May) found the S&P's 12-month forward P/E ratio of 20x has only been higher during the throes of the dotcom bubble in the late 1990s and early 2000s, implying markets are either pricing in a "record short recession" or the US Federal Reserve will begin to buy equities - "neither of which seems likely for now", the firm added.
"Bear market rallies are incredibly common, but quick recoveries from high levels of stress are unprecedented," the research note stated.
"We maintain that if history is a guide it would not be unlikely for the S&P to rally near 3,000 before rolling over and returning to lows, given the size of this shock and the fact it is coinciding with a recession."
It added the bull case for US equities is due to "still-light positioning" and "unprecedented stimulus", which could "further divorce asset prices from economic reality", especially given that earnings uncertainty has climbed to near the highs seen during the 2008 Global Financial Crisis.
"While the Fed has surprised in terms of the lengths it will go to, it is far from buying equities and likely would only consider it if pressed by new lows. There may be a time to co-invest in equities with the Fed, but it will surely be at lower prices," the firm warned.
However, research from Capital Economics shows the recent performance of the US stockmarket has been "largely because the five largest listed companies in the US index have a combined weight of approximately 20%".
Ben Conway, head of fund management at Hawksmoor Investment Management, said it is "certainly a worry" that the US stockmarket is "running away with itself a little".
"The level of over-valuation relative to other markets can be exaggerated due to sector-composition effects: the US should be more expensive due to higher weightings in sectors with better growth prospects and less cyclicality. But even adjusting for this, the US is still expensive.
"Having said that, you could have made this argument for many years, and valuation is never a very good timing tool. large companies that are enjoying the best performance of late (Facebook, Amazon, Apple, Alphabet, Netflix, Microsoft) have huge market shares in their industries, excellent access to finance and have business models that are so far very resilient to the current virus-related economic malaise."
Hawksmoor's Vanbrugh and Distribution funds have relatively low weightings to US equities, with most of the funds' exposure to the US gained through global equity and sector-specific funds.
"We think healthcare and insurance sectors look interesting, with many of the companies in the funds we access in these sectors being US-listed. This is a sector play rather than a US-specific play," he added.
Taymour Tamaddon, portfolio manager of the T. Rowe Price US Large Cap Growth Equity fund, said that the performance of software-as-a-service firms could be "justified if the market is correct in assuming that the slowing US economic activity is an acute and short duration event".
However, he urged more caution than the market seems to be discounting. "The duration and severity of this drop and subsequent recovery in activity is still relatively unknown, investors should be prepared for the recovery to take much longer and that would ultimately have an adverse impact on technology budgets."
However, David Coombs, head of multi-asset investments at Rathbones, said US equities are the most attractive on a regional basis "by a country mile".
"Most of the US companies I own are on 20x to 30x P/E ratios, so it does look very expensive, but when I consider the companies and the sectors that I think are going to recover because they have strong balance sheets and competitive advantages, a lot of them are [in the US]," he said.
Meanwhile, Anu Narula, co-manager of the Mirabaud Global Equity High Income fund, told Investment Week his regional weighting to the US is higher than it has ever been.
"We see political interference more in Europe and less so in the US. For companies in the US so far, the dividend has been sacrosanct. Things like dividend aristocrats are reluctant to cut their dividends," he explained.