"The 'animal spirit' of US stocks goes abroad! European and Asian stocks are rising strongly, experts predict: the carnival is just beginning"

The "animal spirit" that has driven the surge in the US stock market over the past two years is now spreading globally - some market professionals believe that this trend may just be beginning. After soaring more than 50% in 2023 and 2024, the S&P 500 index has remained flat since Donald Trump took office as US president. Popular trades are now shifting overseas, with investors flocking to European and Asian stock markets, ignoring threats of tariffs, trade wars, and military conflicts. Since Trump took office, the STOXX 600 index in Europe has risen by 5.8%, while the Nasdaq Golden Dragon index has surged by 18%. In comparison, the S&P 500 index has only risen by 0.3% during the same period, with a further drop of 1.7% last Friday dragging down its performance. Brad Conger, Chief Investment Officer at Hirtle Callaghan, said, "Due to extreme sentiment and positioning in the US stock market for a long time, this reversal could last a long time." He manages around $20 billion in assets. Conger cited an investor survey by Goldman Sachs at the end of January, which found that the majority of global portfolio managers believe that the US stock market will achieve the best return in 2025. This one-sided sentiment is one of the reasons for his contrarian view: Conger's firm has been increasing its holdings of European stocks since mid-2024 and Chinese stocks since the end of last year. Global stock markets are rising, while the US stock market is stagnant For traders taking the same strategy, the logic is simple. Stocks outside the US have missed out on much of the gains over the past two years, and now, with global economic prospects stabilizing, these stocks appear relatively cheap. Meanwhile, the uncertainty of tariffs primarily affects US market sentiment, and the strength of the US dollar has waned. The popularity of Chinese AI startup DeepSeek has also made investors rethink the high prices of US stocks and has made Chinese tech stocks more attractive in the short term. Overall, these factors are shaking the so-called "American exceptionalism," the belief that the US market will continue to outperform others. "This shift could be long-term rather than cyclical," said Mark Hackett, Chief Market Strategist at Nationwide Investment Management Group, which manages around $75 billion in assets. "Since records began, the performance and valuation gap between the US market and international markets has been greater only during the tech bubble. When this shift occurs, it comes on strong and lasts for a long time." Over the past two years, global stock markets have significantly lagged behind the US stock market, with the STOXX 600 index rising by 20%, the Golden Dragon index rising by only 1%, and the S&P 500 index surging by 53%. Even after this year's rise, the average price-to-earnings ratio of the STOXX 600 index is still 14 times, lower than the S&P 500 index's 22 times. The PE ratio of the Golden Dragon Index is 17 times. Broad prospects for non-US stock markets Fund flows indicate that the potential for growth in non-US stocks may be significant. An analysis by JPMorgan found that excluding Chinese stocks, US stocks have underperformed this year, only representing a 10% to 20% reversal of the pro-US investment theme that dominated the market from April 2023 to the end of last year. Citigroup stated that holdings have "dramatically" shifted towards Europe, with investors now more bullish on Europe than on the US. The upcoming US tax season in March will be another negative factor for the S&P 500 index. As the tax season approaches, the stock buying volume of retail traders, seen as a key force in the US market, may slow down. In fact, Scott Rubner of Goldman Sachs stated last week that he is "watching for revisions" in the S&P 500 index, as both retail and institutional buyers have lost momentum. Meanwhile, Christopher Murphy, Co-Head of Derivatives Strategies at Susquehanna International Group, said that in Europe, investors are flocking to the German stock market or the broader European stock market, indicating concerns that they may be missing out on opportunities. He noted that in recent weeks, the implied volatility of the German DAX index and the STOXX 50 index in Europe has surged significantly. Murphy added, "A rebound in broad indices and a significant increase in volatility are very rare." This trend is supported by fundamentals. In addition to lagging valuations in Europe, the outlook for interest rates is more moderate, and corporate earnings are strong. Optimism surrounding a potential ceasefire in the Ukraine conflict is another favorable factor, along with expectations of increased military spending boosting European defense stocks. Is the European and Asian investment boom overheating? Some analysts believe that the influx of investments into Europe and Asia has been so intense that it may be time to pause. Nikolaos Panigirtzoglou, global market strategist at JPMorgan, said that momentum indicators for indices such as the STOXX 50 in Europe suggest that the rally has been too rapid, which may signal an impending reversal. Others still see ample reasons to continue betting on the US stock market, even as the S&P 500 index remains near its historical highs. Stock strategists at Bank of America, led by Savita Subramanian, said, "The US has key structural advantages." They mentioned US energy independence, a flexible workforce, and the reserve currency status of the US dollar. These strategists note that the US tech industry still maintains a leading position, although the launch of DeepSeek challenges the notion that the US dominates in this field. However, given the significant impact of US tech giants on the US stock market, even a slight loss of confidence in these companies could have a big impact. Conger of Hirtle Callaghan said, "The narrative on artificial intelligence is a very bullish reason for the US stock market. If expectations for AI in the US are not adjusted, non-US stocks will not be able to outperform US stocks."