Financial experts believe that the globalization of the animal spirits that propelled the US stock market over the last two years may only be beginning. Since US President Donald Trump took office, the S&P 500 Index has stagnated after rising more than 50% in 2023 and 2024. Despite the risks of tariffs, trade wars, and bloody battles, investors are flooding into European and Asian markets as the hot trade moves abroad.
The Nasdaq Golden Dragon Index, which monitors US-listed firms that operate in China, has risen 18% since just before Trump took office, while the Stoxx Europe 600 Index has increased 5.8%. The S&P 500, on the other hand, only saw a 0.3% rise throughout that time, and Friday’s one-day 1.7% decline worsened the underperformance.
“This reversal can now go a long way because sentiment and positioning in US equities were so extreme for so long,” said Brad Conger, chief investment officer at Hirtle Callaghan, which manages around $20 billion.
Conger referenced a Goldman Sachs Group Inc. investor survey conducted in late January, which revealed that most worldwide portfolio managers thought US stocks would yield the highest returns in 2025. Conger’s company has been overweight in Chinese stocks since late last year and European stocks since mid-2024, which is one reason he’s been moving in the other direction.
The reasoning makes sense for traders who follow suit. Since the global economic picture has steadied, stocks outside the US suddenly appear relatively inexpensive after missing out on most of the gains over the previous two years. At the same time, the US attitude has been primarily affected by tariff uncertainty, and the dollar’s strength has diminished.
In the short run, investors are finding Chinese tech companies more attractive due to the buzz around the Chinese artificial intelligence firm DeepSeek, which has caused them to reevaluate the high pricing of US stocks. Combined, these factors are upending the “US exceptionalism” theory, which holds that American markets should continuously perform better than their rivals.
Mark Hackett, chief market strategist at Nationwide Investment Management Group, which manages assets worth around $75 billion, stated that this change might be secular rather than cyclical. The technological bubble was the only other period in history when there was such a significant disparity in valuation and performance between local and foreign markets. The transition at that time was substantial and prolonged.
While the S&P 500 surged 53% over the last two calendar years, global stocks fell well short of the US, with the Stoxx 600 climbing 20% and Golden Dragon gaining only 1%. Despite this year’s catch-up, the European gauge’s average price-to-earnings multiple is still 14 behind the S&P 500’s 22. The multiple for the China index is 17.
Money flows indicate that non-US stocks may have a lengthy runway ahead. According to JPMorgan Chase & Co. research, the relative underperformance of US stocks this year, excluding Chinese companies, barely amounts to a 10% to 20% reversal of the pro-US investing pattern that prevailed from April 2023 to the end of last year. According to Citigroup, investors are more optimistic about Europe than the US since positioning has changed so “dramatically” in favor of Europe.
Another obstacle for the S&P 500 will be the approaching US tax season in March. As tax season approaches, retail traders’ equity purchases, a significant factor in American markets, may decrease. Scott Rubner of Goldman stated last week that he was on “correction watch” for the stock benchmark because institutional and individual purchasers are losing ground.
Christopher Murphy, co-head of derivatives strategy at Susquehanna International Group, stated that the rush into German stocks or more general European equities indicates investors are motivated by a fear of losing out. He pointed out that implied volatility has increased significantly in recent weeks in the Euro Stoxx 50 Index and Germany’s DAX Index. “Seeing a macro index rally and volatility move significantly higher is extremely uncommon,” Murphy continued.
But the move is supported by fundamentals. Corporate earnings have increased, and interest rates have a more benign future than Europe’s trailing values. Expectations for additional expenditure to help maintain peace, which has benefited European military businesses in particular, and growing confidence about a possible truce in Ukraine are also positive.
Some believe the rush into China and Europe has been so rapid that it’s time for a respite. According to indicators of momentum, the Euro Stoxx 50 and the Hang Seng China Enterprises Index have increased too quickly and too far, which might indicate a reversal is approaching, if not imminent, according to Nikolaos Panigirtzoglou, global market strategist at JPMorgan. Even if the S&P 500 is close to all-time highs, some people still see many reasons to continue placing bets on the US.
Under the leadership of Savita Subramanian, the equity strategists at Bank of America stated that the United States had significant structural advantages, including energy independence, a fungible labor force, and the dollar’s reserve currency position.
Although DeepSeek’s debut has questioned the US’s hegemony in that area, the strategists stated that America’s technological sector still leads the world.
However, given their disproportionately enormous effect on the US stock market, even a slight reversal in confidence regarding the dominance of US tech firms may have a significant impact. Additionally, every aspect adds considerably when the tide turns opposite.
Conger of Hirtle Callaghan said, “The AI narrative was the justification for the extreme bullishness in US stocks.” “If the AI expectations in the US hadn’t been readjusted, non-US stocks would not have been able to outperform.” With help from Abhishek Vishnoi, Sagarika Jaisinghani, Yiqin Shen, Jessica Menton, and Natalia Kniazhevich.
