Who’s in the driver’s seat: The US government or US corporates?

Reflecting on the past 12 months and thinking ahead we can break down key US equity drivers into two camps: those affecting the market’s path and short-term volatility and those affecting the market’s longer-term direction.

The market’s path – reacting to the news flow

Uncertainty around tariff levels, the timing and form of trade deals, and substance of the One Big Beautiful Bill (OBBB) were the main near-term risks of Trump’s first 8-months in office. As these outcomes have become clearer, markets can shift focus to the longer-term risks: the expected impacts of implemented policies.

Trump’s tariffs are a tax on consumers. As they stand, they will be the fourth largest non-war related US tax increase in history, and the largest overall tax increase since 1993.

They have also caused a short-term inflation risk that has forced the Fed to slow its cutting cycle, leaving rates at their highest levels since pre-GFC, at a time when the labour market has started to weaken. Each of these factors are potentially negative for consumers and confidence.

This consumer tax is offset by the additional government revenue raised which is to be put toward the US administration’s goals of promoting growth, through the OBBB, while aiming to reduce the imposing US deficit.

Taken together, according to the Tax Foundation’s estimates, the US policy mix will result in a continuation of the past decade with the US government contributing to long term GDP growth, by around 0.2%, funded by a higher US deficit. With a lot of the tax cuts and spending benefitting the US corporate sector and disproportionately benefitting richer Americans.

While there are longer term implications for global trade and national industry mixes, we believe in the short-term these factors, policy uncertainty, trade deals, OBBB tax cut extensions and spending initiatives will continue to be key drivers of the path that the US market is taking. Causing periods of higher volatility and potential market corrections.

However, without expectations of a US recession, we believe policy reaction from both the US government and Federal Reserve will be adequate in supporting markets through these short terms volatility bouts.

For asset allocators and long-term investors, the direction of markets is more important than the path. And for the direction, we turn to the US corporate sector.

The direction

Downgrades heading into the Q2 corporate earnings season were misguided as the S&P 500 reported an impressive year-on-year (YoY) earnings growth rate of 11.8%, more than double the 4.9% expected at June 30¹.

There was a continuation of the broadening out narrative with nine of eleven sectors reporting YoY growth in earnings and the largest earnings surprises coming from the financial and health care sectors. However, the continued influence of the big US technology companies and AI related growth cannot be overstated. Excluding the Magnificent 7 (Mag 7) would’ve more than halved the S&P 500’s YoY earnings growth, to 4.1%².

Investors now value these seven companies at 55% of US GDP, up from less than 10% a decade ago. Collectively, they increased their earnings by US$124 billion over the past 12 months – close to double the total earnings of the largest 200 companies in Australia³.

It is important to acknowledge the growing divergence between these 7 companies that have been used as a signifier if US mega cap outperformance. The large-scale cloud computing providers or ‘hyperscalers’, Amazon, Microsoft, Alphabet and Meta, are decoupling from Tesla and Apple, with Nvidia remaining a core beneficiary of the AI rollout.

Earnings growth has stemmed from core business momentum across advertising, search, e-commerce, and now AI monetisation. Meta’s AI-powered algorithms are driving higher ad conversion and engagement, while Microsoft’s rollout of CoPilot is boosting revenues. Data from Ramp Business Corporation shows US businesses are adopting AI with 43% now paying for one or more AI models or platforms, up from 23% at the end of last year⁴. We believe that advancements in AI can continue to accelerate earnings from here as the hyperscalers have deep moats and AI products and services that can deliver productivity benefits to their customers.

On the other hand, Tesla’s business model is fundamentally different to the hyperscalers and Apple has also lost touch with the pack after facing delays in rolling out AI features that have generally underwhelmed users. The company is under increasing pressure to make a big AI acquisition to catchup to others like Meta and Microsoft.

To expand AI’s contribution further, the US hyperscalers are investing heavily, with over US$340 billion in capital expenditure planned this year alone – a scale that is already influencing US GDP growth⁵.

Crucially, the benefits of AI spending are also extending beyond mega cap tech. As compute capacity increases, other Nasdaq 100 technology companies are scaling rapidly, improving margins, and capturing new profit opportunities.

For example, Palantir’s Foundry and Gotham platforms enable customers to expand data analytics workloads on Google Cloud, driving margin tailwinds, while Lam Research attributed strong demand for advanced semiconductor manufacturing, particularly in AI, to its growth. Both companies posted stronger Q2 earnings growth than their larger counterparts.

Companies outside the mega caps within the Nasdaq 100 are on track to grow earnings by over 20%, compared with just the 4.1% for the S&P 500 excluding these same names⁶. This divergence underscores the expected broadening in earnings growth is accelerating in technology names much faster than traditional industries.

While the hyperscalers continue to lead the market in scale and innovation, a growing cohort of Nasdaq 100 companies is now leveraging AI to accelerate profits, creating a wider set of opportunities for exposure to future US equity growth. Rather than the S&P’s 493, it is the Nasdaq 100’s 93 that represent the most exciting opportunity set for investors in the next phase of the market cycle alongside the evolving tech hyperscalers.