Analysts at Goldman Sachs and JP Morgan have a pessimistic outlook for the S&P 500. With that in mind, investors might look at the FTSE 100 as a better long-term bet right now.
I can see the reasons for being wary of US stocks at the moment. But I think there are opportunities on both sides of the Atlantic right now.
US vs UK
According to Goldman, the S&P 500 will return around 3% a year over the next 10 years. If that’s correct, investors who own the index will probably be disappointed a decade from now.
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JP Morgan analysts also have a underwhelming view, expecting 5.7% a year. That’s a better result, but it’s still below the average FTSE 100 return over the last decade.
That might make it tempting to avoid the S&P 500 right now. But while I wouldn’t buy the index, I think staying away from US stocks entirely would be a mistake.
Over the last 10 years, the S&P 500 has handily outperformed the FTSE 100. Despite this, there have been some UK stocks that have delivered better returns than the US index.
Experian‘s a good example (and it’s just one among several). After a 314% gain, investors who bought the stock in 2014 have done better than they would have by investing in the US index.
This shows that even in an underperforming index, there can be individual stocks that generate great returns. And that’s why I think avoiding US stocks entirely could be a missed opportunity.
Which stocks should I buy?
With a 10-year time horizon, I’m looking for shares that are out of fashion at the moment, but where the underlying business is resilient. McDonald’s (NYSE:MCD) is a good example.
The McDonald’s share price fell sharply on Wednesday (23 October) on news of an outbreak of E. Coli linked to its products. I think this looks like a buying opportunity though.
Unlike other restaurants, the company makes money by leasing its properties to franchisees. That gives it a source of income that doesn’t come from selling food.
This means McDonald’s can keep its prices down without destroying its profits in ways that competitors can’t. And I think this is going to be a big advantage over the next decade.
One potential risk with the business is debt. This has been growing and while earnings have also been increasing, the company’s net-debt-to-EBITDA ratio is higher than it was 10 years ago.
McDonald’s Total Debt & Net Debt to EBITDA 2014-24
Created at TradingView
The ratio’s started to improve, but this is still something to keep a close eye on. I expect McDonald’s to do well over the next decade, but I see debt as the biggest risk to that thesis.
Investment opportunities
The S&P 500 might be set for a difficult decade. But that doesn’t convince me to stay away from US stocks entirely, just as an underperforming FTSE 100 doesn’t stop me buying UK shares.
In both cases, I think there are potential rewards on offer for investors who are willing to consider individual stocks. And that’s true on both sides of the Atlantic.
