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If we rewind a few years, the number of UK investors who bought US stocks was quite small. Yet following the AI boom and increasing interest from the younger generation, buying interest in S&P 500 shares has rocketed. The returns from the past couple of years versus the UK market are also quite stark. So, for my free cash, where should I be focused at the moment?
The case for the US
Over the past year, the S&P 500 is up 13.6%, in comparison to the 4.3% from the FTSE 100. Therefore, the case could be made that if I want to achieve higher returns, I should invest in the US. Part of this does make sense, given that moe of the world’s largest companies are based over there.
When I consider key themes right now, such as AI, big tech and defence, the main players are listed on the US stock market. For example, consider Nvidia (NASDAQ:NVDA). The firm has been unstoppable for the past couple of years and is showing no signs of slowing down. It’s up 41% over the past year.
The business is continuing to innovate, with new Blackwell architecture announced earlier this year. These chips are designed for generative AI workloads, offering enhanced performance and efficiency. Further, it launched the DGX Spark, a compact AI supercomputer suitable for desktop environments.
I think the stock could keep rallying based on these new products, as well as maintaining the strong financial performance. As the profits keep rolling in, it provides funds to help push new ideas.
One risk is that it’s tough to maintain the dominance in the AI chip market. Other companies know it’s lucrative, so will be aiming to eat away market share over the coming year.
The case for the UK
The main argument I’d make for the UK stock market is valuation. The price-to-earnings ratio for the S&P 500 is 28.32. In contrast, the FTSE 100 is 15.9x. So, the UK is almost half as expensive as the US. Of course, this is just one ratio. But it goes to show that UK stocks as a whole can be seen as better value for investors.
Going further, this could mean that if I buy UK stocks, there’s more potential benefit for me in the long term. It should be easier for these companies to rally, rather than US shares that are potentially overvalued.
In reality, I don’t think I have to choose one or the other. Rather, I think the ideal position is to allocate to my buying to both the UK and the US. This allows me to diversify my portfolio overall. It means I can add some UK value stocks alongside exposure to US AI firms. Doing so reduces my risk of one geographical market underperforming the other over the coming years.
