Key Takeaways
- The US economy and equity markets were expected to outperform in 2025 but so far, the reverse has happened. There is uncertainty around US policy and the new administration seems willing to tolerate near-term weakness in pursuit of their long-term aims.
- The main US indices have fallen into correction territory but China and Europe’s markets have been strong. Germany is planning significant changes in fiscal policy, and these are likely to boost growth in the near term.
- Investors have been keenly focused on the US and markets perhaps went too far. Europe generated expectation beating earnings in Q4 2024 and China has become progressively more market friendly. Attractive opportunities at reasonable prices can be found outside of the US.
- Despite uncertainties we believe that fundamentals in the US remain sound – hard data is robust and there is scope for interest rates to fall further. Post recent share price moves select companies are trading at more realistic valuations.
When Donald Trump swept to power last November, there was a clear consensus among analysts about the likely impact on economies and markets. The new President’s tax cutting and deregulation agenda would be good for the US economy and stock market. Yes, tariffs were a negative but big exporters like Europe and China were likely to suffer most. With the European economy stagnating there was a clear risk of recession and China was struggling too. So, US equities and the economy were set to outperform.
So far this year, we have seen the exact opposite. US equities have fallen and are in correction territory for the main indices. Equities in China and Europe meanwhile, have been strong. Forecasts for economic growth and corporate earnings have been cut in the US but raised in Europe and China. Germany is planning a dramatic change in fiscal policy. If implemented, this would raise growth in the medium term. By contrast, the dramatic changes in US policy are generating great uncertainty domestically and the new administration has made it clear that they are willing to tolerate temporary weakness in the economy and markets in pursuit of their long term aims.
So, is the era of US exceptionalism over? Investors did become over-invested in the US and the valuation gap with other markets did go too far. Europe generated much better-than-expected earnings in Q4 2024 and the economic prospects for Germany have notably improved. Policy in China has become progressively more market friendly. Our stock pickers with a global focus are underweight US equities and have invested in some Chinese companies for the first time in a while: not because of any asset allocation decision but because they have found attractive companies at reasonable prices outside the US.
There are undoubtedly big long-term changes at work. Tariff turmoil is a deterrent to trade and investment. Europe is having to become more self-reliant on defence and the old order is being disrupted in many ways. Despite all this, the fundamentals in the US remain sound. Yes, recent economic data have been disappointing but mostly in terms of surveys. The hard data, including on employment have been fine. Inflation is moving under control and interest rates will fall further. They still have world beating companies and these are now available at more realistic prices. The US market remains attractive in my view.
