US Markets in Turmoil as “America First” Era Fades, Leaving Investors to Look Elsewhere
The Shift Away from US Assets: A New Era of Global Market Leadership
In recent weeks, investors have witnessed a significant shift in market sentiment, as the aura of US economic and market exceptionalism begins to fade. The once-unstoppable S&P 500 Index has logged one of its worst weeks of underperformance relative to the rest of the world this century, while the US share of world market capitalization has slipped since peaking above 50% early this year.
This paradigm shift is largely attributed to a combination of factors, including Donald Trump’s on-again-off-again trade war, aggressive posture toward Ukraine, and a wave of Elon Musk-driven government cuts. These developments have united with a suddenly weakening economy to undermine sentiment, eroding the "Trump bump" that was once seen as a catalyst for economic growth.
The Rise of Global Market Leaders
Meanwhile, other regions are capitalizing on this shift in market sentiment. Germany’s plan to massively increase spending is being lauded as a sea change in European policymaking, lifting the region’s stocks, currency, and government bond yields. China’s emergence as a major player in the tech sector is also raising questions about America’s supremacy.
In particular, the Hang Seng Index has been trouncing other major equity benchmarks to start the year, led by tech giants like Alibaba Group Holding Ltd. and BYD Co Ltd. Investors are betting that Chinese tech companies can shake off years of underperformance, feeding into the strength of China’s economy.
The Decline of US Megacap Stocks
US megacap stocks have been struggling in recent months, with the so-called Magnificent Seven tech behemoths down a collective 11% this year. Tesla Inc.’s slide has dragged these companies down, coinciding with Germany’s DAX Index hitting an all-time high as defense stocks from Rome to Paris and European steelmakers rallied amid the changing policy backdrop.
The S&P 500 is still markedly cheaper than the Stoxx Europe 600 Index on an earnings basis. Furthermore, some key US company results have disappointed, dimming the fervor around some of the past year’s big winners.
The Future of US Market Leadership
While it is unlikely that the US will be permanently knocked from its perch as the biggest and most robust market, the current shift may have room to run. Could this rotation continue for the next six months or even the next 12 months? Absolutely, says Daniel Skelly, head of Morgan Stanley’s Wealth Management Market Research & Strategy Team.
The Dollar Fade
The world’s primary reserve currency is now almost 4% below the post-election peak it reached in January. The slide accelerated last week, pushing the Bloomberg Dollar Spot Index to its lowest since early November. European markets were a big driver, as German benchmark yields rose to the highest since 2023.
Narrowing Gap
The persistent US yield premium over Germany has shrunk abruptly, to the slimmest since 2023, potentially undermining the relative appeal of Treasuries. This narrowing gap is underscoring the diverging trajectories of the two markets.
For international investors, there’s another consideration when assessing whether to allocate to US debt: volatility. A widely watched measure of US rates turbulence has surged to the highest since the day after the US election. Owning long-duration US Treasuries is "normally a safe haven," says Monica Defend, head of the Amundi Investment Institute. "Now it’s a tactical trade because Treasuries have been so volatile."
Credit Impact
All of these forces are working to the detriment of US companies, who may have a harder time attracting European buyers when they sell debt. Those investors make up more than half of the overseas buyers of US corporate bonds, according to JPMorgan.
Conclusion
The shift away from US assets is a significant development in global market leadership. As investors reassess their portfolios and consider allocating to other regions, it’s essential to understand the underlying drivers of this trend. The rise of China and Europe, combined with the decline of US megacap stocks, are all contributing factors.
While the US may not be permanently knocked from its perch as the biggest and most robust market, the current shift has significant implications for investors worldwide. As we move forward in this new era of global market leadership, it’s essential to stay vigilant and adapt our strategies accordingly.
