Flick through sell-side research notes from the end of last year and you’ll find plenty of analysts crowing about “US exceptionalism”, China’s “uninvestability” and Europe’s dull stock markets. In the two months since President Donald Trump’s inauguration, that’s all changed. A Bank of America survey of fund managers this week revealed that equity allocations to the US had fallen by the most on record in March. Money has been flowing rapidly west to east. The valuations of European and Chinese companies finally have uplift.
The White House’s tariff-raising agenda, America-first foreign policy and all-round unpredictability has dramatically altered the economic assumptions underpinning long-held market narratives. At home, Trump’s determination to raise import duties, despite concerns over higher prices and supply chain disruption, is sapping business confidence. That’s despite multibillion-dollar commitments by Nvidia and TSMC to invest in chip manufacturing in the US. Indeed, consumers — the basis of America’s recent economic outperformance — are now making cutbacks.
Understandably, then, investors are looking for somewhere else to put their cash. In Europe, the president’s threats to Nato have jolted Germany and the EU more broadly to promise more defence spending. This has sparked demand for Europe’s industrial stocks. Some analysts now even speak of “europhoria.”
Not all market shifts emanate from Trump. Expensive US stocks were long due a correction. In China, technological advances have rebuilt faith in its private sector. DeepSeek has surprised tech analysts with its advanced artificial intelligence model using cheap chips. On Monday, electric vehicle maker BYD unveiled a battery that can charge in five minutes. Beijing has played a role too. It has stepped up stimulus support for the deflating economy. It has announced a plan to “vigorously boost” weak consumption, but investors want more details.
Policymakers are also trying to keep up with the shifting economic and geopolitical sands. Central bankers are flustered. The Bank of Japan, US Federal Reserve and Bank of England all met this week, held interest rates and raised concerns over the uncertain outlook. On Wednesday, reflecting the stagflationary effects of Trump’s on-and-off tariffs, the Fed slashed its growth forecasts and raised its inflation projections. The foggy trade-off between weaker economic activity and higher inflation expectations complicates its decision on interest rates, and raises the risk of a policy error.
In Europe, governments are also fretting over how to finance higher defence spending. With Covid-19 debt piles still a drag, further borrowing risks pushing up the cost of credit even further. Though Germany has fiscal room, its spending plans have already pushed up European bond yields. In China, the need to bolster consumer demand may be affected by a desire to hold back fiscal firepower to support exporters, depending on how the trade war with America advances. The prospect of retaliatory tariff measures also somewhat damps the growth outlook in the EU and China.
In uncertain times, it may be tempting to lean on the optimistic market themes that have developed in Europe and China. But it will still be some time before either can exert the level of influence America has across the global economy and financial markets. A weaker economic outlook in America tends to dent global prospects at large. Investors burnt by the recent plunge in the peerless S&P 500 face an uphill battle to recoup losses by investing abroad. Many will hope the US regains its poise. Even then, the danger is that the recent loss of confidence in America’s exceptionalism leaves a lasting mark.
