The S&P 500 has underperformed global stock indexes this year, sparking concerns among investors worldwide. The longstanding dominance of the US stock market is being challenged as uncertainty grows over the implications of President Donald Trump’s economic policies. This uncertainty has led investors to seek opportunities in European and Asian markets, causing a significant shift in asset allocation.
According to a survey by Bank of America, Wall Street has witnessed a historic decline in investment in US stocks, while there has been a substantial increase in allocation to European stocks. Analysts believe that the perception of US exceptionalism may have reached its peak, prompting a reevaluation of investment strategies.
Following a period of remarkable growth, doubts were already looming about the sustainability of the US market’s performance. Trump’s trade and foreign policy decisions have further fueled apprehensions, leading to a shift in sentiment among investors. Market strategist David Russell noted a noticeable change in investor sentiment, with a growing preference for European and Asian markets.
Recent market movements reflect this shift, with the S&P 500 trailing behind global indexes that have seen gains in China, Europe, and Mexico. As Europe shows signs of stability and certainty, the US outlook appears increasingly uncertain. Factors such as heightened economic policy uncertainty and concerns over the impact of Trump’s policies on economic growth have contributed to this divergence.
Companies like FedEx are already feeling the effects of this uncertainty, with lowered profit forecasts and market turmoil attributed to tariffs and trade policies. The European market, on the other hand, has been buoyed by increased defense spending following shifts in US foreign policy, leading to strong performances in indices like Germany’s DAX.
Amidst these evolving market dynamics, investors are navigating a landscape of uncertainty and seeking opportunities that offer greater stability and clarity, with Europe emerging as a potential stronghold for investment amid global economic shifts.
Increased government spending in Germany is expected to give a boost to economic growth forecasts. “While this move is a response to US policies, it brings significant economic advantages to Germany,” remarked Kristina Hooper, chief investment strategist at Invesco. The DAX index in Germany has surged by 15% this year. Ross Mayfield, an investment strategist at Baird, raises the question of whether the slightly more isolationist policies under the Trump administration may lead to a new phase in international investing.
The S&P 500 and Nasdaq have both entered correction territory this month, with declines of over 10% from their peak. Although the S&P has recovered slightly from correction territory, it remains 7.8% lower than its record high. Trump’s tariffs have impacted the markets, but other factors are also contributing to the lackluster performance. The tech stocks that drove the US market in 2024 are struggling at the start of this year, with most of the “Magnificent Seven” tech stocks, except Meta, experiencing losses. Alphabet, Amazon, Apple, Nvidia, and Tesla are all down by more than 10%, while Microsoft is down by 7%.
In January, DeepSeek’s AI model surprised investors and Silicon Valley, causing ripples in the US market and raising doubts about the worth of the AI boom. Chinese electric vehicle manufacturer BYD is aiming to solidify its position as a strong competitor to Tesla, whose stock price has dropped by nearly 40% this year. In response to Trump’s tariffs, the Chinese government implemented a “special action plan” to boost consumer spending, leading to a surge in Chinese stocks. Hong Kong’s Hang Seng index has seen an 18% increase.
TradeStation’s Russell notes that stock performance does not necessarily reflect the true value of an economy. While the US economy remains stronger than Europe’s and more reliable than China’s, the initial weeks of Trump’s second term have not matched the pro-business expectations following his reelection in November.
