After President Trump startled the global markets with his tough tariffs earlier this year, some investors shifted their focus away from the US. However, it seems the tide is changing again.
U.S. stocks have bounced back robustly, reaching new record highs and diminishing the outperformance European markets enjoyed for much of the year.
The S&P 500 is currently up 13% for the year, while the Nasdaq has risen by 17%. Both indices surged by 5% in late June when the broad market index hit prior all-time highs.
In contrast, Germany’s DAX Stock Market Index has seen a 19% increase this year, slightly down from 20% in June. Other European indices have also posted gains, yet they pale compared to those of U.S. stocks. The UK’s FTSE 100 is up 13%, a jump from 8% in June, and the MSCI Europe Stock Index rose to 25% from 21%.
China’s situation paints a different picture. Hong Kong’s Hang Seng index has risen by 32% this year, compared to a 21% profit earlier this year.
Investor sentiment regarding Europe has shifted notably. There’s growing anxiety over the UK’s and France’s financial outlooks, and economic growth seems constrained. Moreover, expectations for significant government spending and deregulation haven’t materialized yet.
“Outside of Germany, investors seem frustrated with the lack of progress. There’s no sign that the German government will initiate substantial spending,” noted an analyst from Deutsche Bank in a recent memo. “This has fueled worries that the government may be hesitating in its commitment to promised defense and infrastructure spending.”
While there’s still a belief that a “sugar rush” will come eventually, the outlook for long-term growth feels a bit dim.
On the flip side, the U.S. market has benefitted from the ongoing excitement surrounding the AI revolution, a lessening of Trump’s trade tensions, strong corporate earnings, steady GDP growth, resilient consumer behavior, tax cuts, and a more accommodating Federal Reserve.
The U.S. stock market could see further boosts from central banks, narrowing the gap with Europe even more.
On Wednesday, the Fed cut rates for the first time since December, but Wall Street interpreted Chairman Jerome Powell’s remarks as cautionary.
He labeled the cut as a “risk management reduction,” implying that this doesn’t signal the start of an aggressive series of rate cuts. Powell also mentioned that there’s no option without risk and uncertainty remains about future developments.
However, economists at City Research disagreed with the market’s perception of Powell as hawkish, suggesting instead a more optimistic take on his comments.
“Powell later explained that the impact of today’s cuts relies on further market price reductions rather than just the one 25 basis point cut. Fed officials are hinting that they might cut rates by 75 basis points in total this year,” City stated in a memo on Wednesday.
Meanwhile, a JPMorgan stock strategist highlighted on Thursday that the S&P 500 typically averages a 26.5% gain in the second year of an easing cycle, even without a recession, compared to a 13.7% growth in the first year. Since rate cuts began last September, the market has outperformed the usual first-year growth, now sitting at a 17.6% increase, according to JPMorgan.
“Rate cuts have historically provided significant support for revenues through consumer and investment spending, acquisitions, and stock buybacks,” the strategist added.
