World stocks surpass U.S. stocks by the largest gap since 1993, outperforming the American market significantly.
Rewritten Article:
In early 2025, the US stock market took a nose dive, underperforming the global market by the largest margin since the 1990s. Donald Trump's unpredictable policies and trade wars sent investors scurrying from American assets in what can be described as a full-on exodus.
The MSCI USA index, a comprehensive index of US equities, plunged by 11% in the first half of 2025. On the other hand, the MSCI all world ex-US benchmark soared by a whopping 4%, marking the widest gap between Wall Street and the global market since 1993.
The stark difference in performance suggests that investors expect Trump's tariff war to have a more detrimental impact on the US economy, hurting growth and fueling inflation, than other economies. This trend was particularly prominent in Europe, where Trump's isolationism led to promises of increased government spending, primarily on defense, which are anticipated to boost the local economy and support equity markets.
Sameer Goel, head of emerging markets and Apac research at Deutsche Bank, explains, "A large part of this underperformance is the repricing of US assets due to increased policy uncertainty and the stagflationary shock from tariffs."
The weakening US dollar has also played a significant role in widening the gap in performance. It has slumped by a whopping 8% against a basket of major currencies, giving a boost to non-US market performance in dollar terms.
Many investors started the year optimistic about US stocks continuing to outshine their global counterparts, given the tax cuts under Trump. However, these positive sentiments quickly evaporated as Trump kickstarted a trade war that was fiercer than most investors had anticipated, sending the S&P 500 plummeting by as much as 12% following his "liberation day" tariff announcement on April 2. Although the S&P has since made a partial recovery as some tariffs were reversed or delayed, it continues to lag behind global rivals such as Hong Kong's Hang Seng and the Stoxx Europe 600.
In Europe, defense stocks have been on a roll, with Germany's Rheinmetall, Italy's Leonardo, and the UK's Rolls-Royce leading indices higher. This surge has been fueled by Europe's plans to increase military spending, aimed at reducing dependence on US support. The Dax index in Germany is up over 20% in dollar terms this year while France's Cac 40 is up around 12%.
In Asia, the Hang Seng has risen by a substantial 10% this year in dollar terms, led by Chinese tech stocks, thanks to the unveiling of new AI models by DeepSeek. These models, according to the company, were trained at a fraction of the cost and computing power than US rivals such as OpenAI.
The shift in global equity dynamics in early 2025 can be attributed to several factors, including sector rotation, valuation adjustments, currency effects, and trade and policy risks. Non-US markets capitalized on surges in cyclical sectors like European banks, defense/aerospace, AI-driven tech in China, and consumer discretionary in India. Additionally, the weaker US dollar amplified returns for international assets, and reduced US-China trade tensions stabilized European markets. On the contrary, US markets were hit by trade uncertainty and inflated valuations.
In summary, the US stock market underperformed the global market in early 2025 due to a combination of factors, including valuation adjustments, sector rotation, currency effects, and trade and policy risks. This underperformance was most prominent following Trump's tariff announcements, which sent the S&P 500 tumbling and created headwinds for US markets compared to their global counterparts.
- The tariff war initiated by Donald Trump's unpredictable policies significantly affected stocks, causing the US market to underperform the global market by the largest margin since the 1990s.
- Investors, anticipating Trump's tariffs to have a more detrimental impact on the US economy, favored global markets over US equities.
- The MSCI all world ex-US benchmark soared by 4%, while the MSCI USA index plunged by 11%, marking a stark contrast between Wall Street and the global market performance.
- In Europe, the repercussions of Trump's isolationism led to promises of increased government spending on defense, propelling the local economy and supporting equity markets.
- Asian markets, such as Hong Kong's Hang Seng, gained a substantial 10% in dollar terms this year, driven by Chinese tech stocks, thanks to the unveiling of new AI models by DeepSeek.
- The shift in global equity dynamics in early 2025 was due to various factors, including currency effects, trade and policy risks, sector rotation, and valuation adjustments, leading non-US markets to capitalize on surging sectors like European banks, defense/aerospace, AI-driven tech in China, and consumer discretionary in India.
