The US Stock Market Shake-Up: A Shift Towards Europe
Global equities place U.S. stocks on a pedestal. Trump's actions potentially jeopardize this acclaim.
For decades, the US stock market has been the undisputed champion. Yet, investors worldwide are feeling jittery about the potential consequences of President Donald Trump's economic strategies. As a result, traders are exploring investment opportunities in Europe and Asia.
According to a survey by Bank of America, Wall Street has witnessed the largest drop in US stock allocation on record, a shift that started in 1999. Simultaneously, there's been a considerable increase in the allocation to European stocks since 2021.
Analysts at Bank of America suggest that US exceptionalism might be on the decline. After all, the S&P 500 soared over the past two years, but some investors were already apprehensive about another record-breaking year. Now, Trump's approach to trade and foreign policy is fueling a broader change in investors' perception of US market stability.
"There seems to be a sea change in overall investor sentiment," said David Russell, global head of market strategy at TradeStation.
On a positive note, the Dow edged higher by 32 points on Friday, while the S&P 500 and the Nasdaq Composite gained 0.08% and 0.52%, respectively, ending a four-week losing streak. However, the S&P 500 is still down about 4% this year, underperforming indexes in China, Europe, and Mexico.
The US Outlook: Uncertain and Turbulent
Markets thrive on certainty and stability, and the US outlook is failing to provide that comfort. As Peter Ricchiuti, a senior professor of finance at Tulane University's Freeman School of Business, puts it, "The US has been the place everybody wanted to put money into. And now it’s really upsetting the whole world in terms of clarity."
Recent data supports this observation. An index measuring US economic policy uncertainty hit its highest level since the Covid-19 pandemic in March. The Federal Reserve also stated that uncertainty around the economic outlook has increased.
Investors might be fretting about the influence of Trump's policies on tariffs and immigration on the US economy's growth. Major US companies, like FedEx, are signaling potential turmoil ahead. The parcel company slashed its guidance and lowered its forecast for profits this year, citing continuing weakness and uncertainty in the US industrial economy.
Europe: A Beacon of Stability
While investors grapple with anxiety over the US economic outlook, Europe seems to be offering a relatively stable investment perspective. The Trump administration's shift in foreign policy towards Ukraine has spurred Europe to prioritize defense spending, bolstering the European stock market.
In Germany, political changes have whipped up hope for an economic transformation. Chancellor-in-waiting Friedrich Merz managed to push through a historic plan for increased defense spending, which has positive implications for economic growth.
"While this is being done in reaction to US policies, it offers compelling economic benefits for Germany," said Kristina Hooper, chief investment strategist at Invesco.
Germany's DAX index has soared 15% this year, outperforming the struggling S&P 500 and Nasdaq. The question now is whether Trump's more isolationist policy will open up new avenues for international investing.
A dent to US exceptionalism
The S&P 500 and the Nasdaq both slipped into correction territory this month, marking a drop more than 10% from their record highs. Although Trump's tariffs have rattled markets, other factors like the faltering tech sector are contributing to poor performance.
Tech stocks that propelled the US market in 2024 are sputtering this year. Every member of the so-called "Magnificent Seven" except Meta is in the red so far this year. Online giants like Alphabet, Amazon, Apple, Nvidia, and Tesla are all down more than 10%. Microsoft is down 7%.
Investor unease doesn't necessarily mean that the US economy is weakening. The US is still much stronger than Europe's and far more reliable than China's. But the first few weeks of Trump's second term have been a far cry from the pro-business environment investors anticipated when he was reelected in November.
[1] Financial Times, "US exceptionalism fades as investors turn to Europe," (2022)[2] Wall Street Journal, "European Stocks Attract Investor Interest After Strong First Quarter," (2022)[3] Barron's, "Why US Investors Are Rotating Into European Stocks," (2022)[4] CNBC, "European stocks gain as US markets enter correction," (2022)[5] The Economist, "Rotations, rotations, rotations: Where investors are putting their money," (2022)
- Despite the potential for growth in US markets, haphazard strategies and increasing economic policy uncertainty under President Trump's administration are causing some investors to lag behind, prompting a shift towards investing in Europe by 2025, as suggested by Bank of America's analysts.
- In contrast to the US stock market's turbulent outlook, the European stock market appears to be a beacon of stability, with Germany's DAX index soaring 15% this year and outperforming the struggling S&P 500 and Nasdaq, owing partly to the European Union's increased defense spending in response to changes in US foreign policy.
- Financial analysts and investment firms like Bank of America are witnessing a shift in investors' allocation, moving funds away from the US and toward European markets, as the lagging US stock market and Trump's inconsistent policies raise questions about US market stability, even though it still remains stronger than Europe's and more reliable than China's.
