New Trends in Global Stock Markets

The surge of “animal spirits” that propelled the U.S. stock market to remarkable heights over the past couple of years is beginning to ripple across global markets, indicating a trend that some market professionals believe is only just taking flightThe S&P 500 index, after a phenomenal increase of over 50% in 2023 and 2024, has been largely stagnant since January 20th of this yearAs a result, a substantial flow of investment is shifting towards foreign markets, with traders increasingly favoring European and Asian stocks, seemingly forgetting about the looming concerns of tariffs.

European indices such as the Stoxx 600 have seen impressive gains of 5.8%, while the Nasdaq Golden Dragon index, which represents U.S.-listed Chinese companies, has skyrocketed by an astonishing 18%. In stark contrast, the S&P 500 index has risen merely 0.3% in the same period, and a steep single-day drop of 1.7% last Friday further burdened its performance.

According to Brad Conger, the Chief Investment Officer at Hirtle Callaghan, the extreme sentiment and positioning within the U.S. stock market make this reversal plausible for a prolonged durationManaging around $20 billion in assets, Conger noted that a recent investor survey conducted by Goldman Sachs at the end of January exhibited a prevailing sentiment among portfolio managers, most of whom believe that the U.S. market will yield the best returns by 2025. This one-sided viewpoint is a major factor influencing Conger to position himself differently, leading his firm to increase allocations in European stocks since mid-2024 and in Chinese stocks since the end of last year.

Amidst a rally in global stock markets, with the U.S. market barely moving, the logic for traders adopting a similar strategy is straightforwardNon-U.S. stocks, lagging in performance over the previous two years, now appear relatively inexpensive as the global economic outlook stabilizesFurthermore, the uncertain tariff environment seems primarily to have impacted sentiment within the American market, with the strength of the dollar waning.

The recent success of Chinese startup DeepSeek in the artificial intelligence space has also prompted investors to reassess the lofty valuations of American stocks, consequently making Chinese tech shares more appealing in the short term

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These dynamics are challenging the notion of “American exceptionalism,” which posits that U.S. markets will continuously outperform other global markets.

Mark Hackett, Chief Market Strategist at Nationwide Investment Management Group, which oversees approximately $75 billion, posits that this shift could be a long-term change rather than a cyclical oneHe pointed out that the only other time records reflected such a significant gap in performance and valuations between the U.S. and international markets occurred during the tech bubbleWhen such a transformative shift occurs, it is typically swift and protracted.

Historically, global stock market performances have woefully trailed behind that of the U.S., with the Stoxx 600 gaining just 20% and the Golden Dragon index seeing a mere 1% increase, compared to a staggering 53% rise in the S&P 500. Even after the recent upticks, the average price-to-earnings ratio for the Stoxx 600 stands at 14 times, significantly lower than the S&P 500’s 22 times and the Golden Dragon index’s 17 times.

The shifting funds suggest that there may be considerable growth potential for non-U.S. stocksA JPMorgan analysis revealed that excluding Chinese stocks, U.S. stocks are underperforming this year, which represents only a 10% to 20% reversal from the pro-U.S. investment theme that dominated the markets from April 2023 to late last yearCiti has noted a significant shift in holdings towards Europe, indicating that investors are now more bullish on Europe than on the U.S.

As the American tax season approaches in March, this may pose another headwind for the S&P 500 indexHistorically, during tax season, retail traders, who are perceived as a crucial driving force behind the U.S. market, tend to reduce their stock purchasesLast week, Scott Rubner of Goldman Sachs expressed that he was placing the S&P 500 under “revision observation,” as both retail and institutional buyers appeared to be losing momentum.

Meanwhile, Christopher Murphy, co-head of derivatives strategy at Susquehanna International Group, indicated that investors are flocking to the German stock market and broader European indices, driven by a fear of missing out on potential gains

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He noted that in recent weeks, the implied volatility for both the German DAX index and the Euro Stoxx 50 index has surged significantly.

Murphy remarked, “The occurrence of a macro index rebounding alongside a substantial increase in volatility is quite rare.”

Underlying this trend are fundamental supportsBeyond the undervalued European stock prices, the outlook for interest rates appears more muted while corporate earnings are showing robust performance.

However, concerns arise among certain analysts regarding whether the influx of investments into Europe and Asia has become overheatedNikolaos Panigirtzoglou, a global market strategist at JPMorgan, indicated that momentum indicators for indices like the Euro Stoxx 50 suggest that the recent upsurge has been too rapid, potentially signaling an imminent reversal.

Conversely, some still believe that a compelling case can be made for continuing to bet on U.S. stocks, even if the S&P 500 remains close to its historical peaksSavita Subramanian, head of U.S. equity strategy at Bank of America, articulated that the U.S. maintains critical structural advantages, such as energy independence, alternative labor sources, and the reserve currency status of the dollar.

These strategists assert that the U.S. tech sector continues to maintain its lead, despite DeepSeek’s emergence challenging the narrative of American dominance in that arenaNevertheless, the substantial sway that U.S. tech giants have on American stock performance means that even a slight dip in confidence regarding the tech behemoths could have a significant impact.

Conger of Hirtle Callaghan noted, “The narrative surrounding artificial intelligence has been a major reason for the bullish sentiment in the U.S. stock marketIf the expectations regarding artificial intelligence in the U.S. don’t recalibrate, non-U.S. stocks cannot outpace U.S. stocks.”

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