US stocks are facing increased pressure as investors reassess the impact of President Donald Trump’s economic policies, while European markets experience a surge in optimism.
Since Trump’s second term began, expectations of an "America First" economic boom have been dampened by concerns over trade tariffs, slowing economic data, and a sell-off in major technology stocks.
Meanwhile, European stocks and the euro have strengthened, driven by stimulus measures and rising defense spending across the continent.
Markets reverse early Trump rally
Investor sentiment following Trump’s election win in November 2024 initially boosted US equities and the dollar, mirroring trends from his first term. However, growing worries over trade restrictions and weaker economic indicators have prompted a shift.
US stocks, once seen as the primary investment destination, have underperformed relative to European markets. The S&P 500 has risen 6% over the past six months, trailing behind France’s CAC 40 (9%) and Germany’s DAX (20%), while the region-wide Stoxx Europe 600 is up 8%.
Tesla, which saw a sharp rise in value after Trump’s election, has now erased nearly all its post-election gains.
Meanwhile, the euro reached its strongest level against the US dollar since November, following Germany’s announcement of a major military and infrastructure spending package.
"We have gone from ‘all roads lead to the US’ to seeing numerous cracks in US exceptionalism," said Alain Bokobza, head of global asset allocation at Société Générale.
Trump’s policies drive market shift
Analysts point to concerns over Trump’s trade tariffs and economic outlook as key factors in the changing market landscape.
- Tariffs and economic slowdown: Trump’s 25% tariffs on imports from Mexico and Canada have fueled investor uncertainty, leading to concerns over higher costs and weaker growth prospects.
- Weaker US economic data: A decline in US manufacturing orders in February has further fueled fears of an economic slowdown.
- Tech sector sell-off: US technology stocks, once a major driver of market growth, are now being sold off as investors reallocate funds to European and emerging markets.
"Ironically, in a year where everyone said ‘America First,’ other markets, including emerging markets and Europe, might outperform," said David Hauner, global head of emerging markets and FX strategy at Bank of America.
Europe sees investment boom
In contrast, European markets have benefited from rising defense and infrastructure spending, driving strong inflows into European stocks.
- German defense company Rheinmetall has surged 130% in six months, reflecting increased military investment.
- Siemens Energy shares have risen 115% on expectations of greater public infrastructure spending.
- Inflows into German equities are at a three-year high, according to Goldman Sachs.
Fund managers now see a shift away from Trump's "Make America Great Again" (MAGA) trade toward what some have dubbed a "Make Europe Great Again" strategy.
"With non-US investors, especially Europeans, we are seeing a new Mega motto replacing Maga," said Vincent Mortier, chief investment officer at Amundi.
Interest Rate Expectations and Bond Market Reaction
The changing economic outlook has also affected expectations for central bank policies in the US and Europe.
- Traders now anticipate two or more interest rate cuts from the US Federal Reserve this year, signaling concerns over weaker growth.
- In Europe, expectations for European Central Bank (ECB) rate cuts have been scaled back, with only two or three cuts now expected, down from earlier projections of three to four.
This shift has led to a rally in US Treasuries, with the 10-year Treasury yield falling from 4.8% in January to below 4.3%. Meanwhile, German Bund yields rose to 2.8%, their highest level since late 2023.
Long-term impact on global markets
Investors now question whether they miscalculated Trump’s impact on financial markets.
"The market focused on the benefits of lower taxes and deregulation early on," said Trevor Greetham, head of multi-asset at Royal London Asset Management. "But it was harder to price in the risks of tariffs, deportations, and government cost-cutting measures before they began to take effect."
In Europe, investors hope that the combination of stimulus spending and economic resilience will allow the region to close the long-term performance gap with US markets.
"Europe is at its best in a crisis," said Karen Ward, chief market strategist for EMEA at JPMorgan Asset Management.
"The penny has dropped in Europe that the world has changed. If we do not galvanize and move together, we are going to face significant challenges."
As global investors reallocate capital, markets are watching closely to see if the shift away from US assets is temporary—or the start of a lasting realignment.
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