Over the past month, three unrelated determinants of sentiment in financial markets – Germany’s likely next chancellor Friedrich Merz, DeepSeek and the Conference Board survey of consumer sentiment – have contributed to an unexpected and potentially consequential shift in global stock markets.
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In the weeks following Donald Trump’s victory in the United States presidential election, the S&P 500 index looked like it would keep outperforming global peers, buoyed by investors’ willingness to attach more importance to the promise of tax cuts and deregulation than the threat of higher trade tariffs and more immigration crackdowns.
Analysts believed the theme of “US exceptionalism” – the notion that American assets deserve to be valued more highly mainly because of the US dollar’s role as the world’s pre-eminent reserve currency, the large and resilient US consumer market and the dominance of US technology companies in global equity indices – would be more pronounced in 2025. Yet this is not how things have panned out.
Since the beginning of this year, the S&P 500 has risen just above 1.2 per cent. Meanwhile, the Euro Stoxx 50 index – which tracks the performance of shares in the euro zone – is up 12.4 per cent. The MSCI China index, moreover, has gained 17.9 per cent.
Why are equity markets in much weaker economies that are prime targets for Trump’s trade aggression outperforming the US? There are several reasons. European and Chinese stocks are much cheaper than their US peers. In Bank of America’s recent global fund manager survey, 89 per cent of respondents viewed US stocks as overvalued. In fact, global equities were seen as the best-performing asset class this year, followed by gold and US stocks.
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However, a more important factor that deserves more attention is the unintended consequences of the “America first” agenda. Since Trump returned to the White House, domestic, foreign and economic policies have become intertwined. The war on woke, trade policy, immigration policy, national security and technological supremacy are inextricably linked.