The US stock market has taken a hit this year due to the potential impact of tariffs. Currently, the S&P 500 index is about 12% off its highs. In the past, double-digit pullbacks like this have provided fantastic entry points for long-term investors. So, is now the time to purchase US shares for an ISA?
A complex backdrop
In recent US market meltdowns, we’ve often seen a ‘V-shaped’ recovery – where stocks have instantly rebounded. However, that may not happen this time round.
Ultimately, Donald Trump’s tariffs are creating a lot of uncertainty for US businesses and this could lead to a recession in the months ahead as firms rein in their spending/investment. Therefore, we could potentially see share prices go lower before they climb higher.
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Managing risk
Given the complicated backdrop, I wouldn’t recommend going ‘all-in’ on the US market today. If someone wants to buy US stocks for their portfolio, I’d suggest drip-feeding capital into the market bit by bit.
That way, if share prices end up going lower, they can still potentially capitalise. There’s nothing worse than watching stocks fall to rock-bottom levels and having no money left to invest.
I do think putting some money into US stocks today is smart, however. Because right now, valuations are far more attractive than they were a few months ago.
But we should give a lot of thought to risk management. In this environment, investors shouldn’t ignore the potential for losses.
An ETF to look at
One fund that could potentially help reduce risk – and could be worth considering – is the iShares Edge MSCI USA Quality Factor UCITS ETF. This is an ETF that focuses on stocks in the US market that screen up as ‘high quality’ (stable year-on-year earnings growth, a high return on equity, and low financial leverage).
Generally speaking, high-quality businesses tend to be more resilient than others in recessions. So, they can offer an element of defensiveness for investors (the ETF is significantly outperforming the S&P 500 this year).
A top stock to consider
If you prefer to invest in individual stocks, one high-quality pick that could be worth considering (and one I’ve been buying myself recently) is Microsoft (NASDAQ: MSFT). It’s one of the world’s largest technology companies.
This company has a lot going for it from an investment perspective, in my view. For starters, it has stable, recurring revenues. In a recession, businesses are not going to suddenly cancel their subscriptions to Microsoft 365 (Word, Excel, Teams, etc). So, it’s defensive in nature.
Second, it generates an enormous amount of cash flow every year (free cash flow of $74bn last financial year) and has a rock-solid balance sheet with minimal debt. Companies with these attributes tend to be more resilient than others.
Third, it has plenty of long-term growth potential. Today, Microsoft is one of the world’s leading players in cloud computing and artificial intelligence (AI), so it’s well placed for growth in our increasingly digital world.
Of course, if there was a recession, Microsoft could still be impacted negatively. For example, it could see less cloud computing growth, and this could put pressure on its share price.
Overall though, I think this is a great stock to consider buying in the current environment. At its current valuation, I see it as attractive.
