Global stock market differentiation continues: US stocks are trapped in a "valuation kill", Europe and China are expected to welcome a "double hit from Davis"

Latest statistical data shows that the divergence between the stock markets in the US and Eurasia since the beginning of this year may continue - meaning that Eurasian stock markets could continue to outperform US stocks significantly. This year, the brighter prospects for European and Asian stock markets are gradually emerging in improving trends in corporate profit expectations and the flow of "animal spirits" from the US to Eurasian markets. However, US concept stocks related to artificial intelligence, including the "Big Seven" such as NVIDIA Corporation, Microsoft Corporation, and Alphabet Inc. Class C, are facing market doubts in terms of profits and valuations. According to Bloomberg Intelligence's compiled statistical data, Wall Street analysts have raised the profit expectations for listed companies in the European stock market for the year 2025 by 0.6% since the beginning of the year. Meanwhile, due to recent economic data showing high inflation and a decline in the US service sector supporting the economy, the market is increasingly concerned about the US economy falling into "stagflation." The overall profit forecast for US listed companies has been lowered by about 1% in the past month, with the semiconductor sector, represented by NVIDIA Corporation (NVDA.US), leading the decline in performance expectations. Although the overall profit expectations for the US stock market have been adjusted from a higher base level, this trend still indicates a continued bull market for the European benchmark stock index - the Stoxx 600 index, signaling the so-called "long-term bull market" prospects as the index moves towards its strongest first quarter performance relative to the S&P 500 index in the past ten years. In Asia, analysts have turned optimistic about corporate profit expectations, especially for the largest stock market in Asia - the Chinese stock market (including Hong Kong and A-share markets) - where corporate profit expectations are continually improving. The so-called "animal spirits" in the stock market are moving out from the US stock market and accelerating their penetration into the European and Asian stock markets, driving the emergence of the so-called "high valuation" market in Eurasia and the sustained growth market driven by improved performance expectations. This is why some analysts predict that Europe and the Chinese stock market will experience a "Davis double hit" - a continuous upward trend catalyzed by synchronized increase in corporate profits and valuations. "Animal Spirits," an economic and financial term originally proposed by economist John Maynard Keynes in his 1936 classic work "The General Theory of Employment, Interest, and Money," refers to the emotions and confidence factors of humans in economic activities, specifically the psychological dynamics that drive investment, consumption, and economic decisions, often based on irrational factors. In modern economics, "animal spirits" are used to explain the "irrational factors" behind market fluctuations, economic cycles, especially in cases where traditional economic models cannot fully explain the phenomena, such as the short-term volatility in the stock market. Therefore, "animal spirits" are considered the core catalyst for the so-called "high valuation" market in the stock market. The "animal spirits" that have driven the US stock market to soar in the past two years are now accelerating to "export" globally, while the "animal spirits" in the US domestic market are showing signs of "diminishing" due to the latest weak economic data and high inflation expectations. Some market professionals say that this trend may have just begun. DeepSeek's groundbreaking "ultra-low-cost AI megamodel", which has reshaped global investors' reassessment of Chinese assets, especially the unprecedented catalyst for the Chinese stock market (including Hong Kong and A shares), has sparked an unprecedented investment frenzy in the field of Chinese artificial intelligence, which may lead to a fiery market for Chinese technology stocks and possibly drive both Hong Kong and A shares into a long-term bull market. Overall, these factors are shaking the so-called "American exceptionalism," i.e., the belief that the US market will continue to outperform other markets. US stocks face "valuation killing," while Eurasian stock markets may usher in a "Davis double hit" A series of negative economic news has led to a sharp decline in the market, making last week a very difficult one for the US stock market. Combined with the emergence of DeepSeek before, the "Big Seven" with historically high valuations inevitably enter a continuous correction trend, with a so-called "valuation cutting" market appearing, and this trend seems difficult to stop in the short term. On the latest economic data, the pace of US economic expansion slowed down to near stagnation in February. The US composite PMI dropped from 52.7 in January to 50.4, hitting a new low in 17 months. Even more pessimistic data reveals that the massive service sector activities essential to the US economy contracted for the first time in over two years with the service sector PMI initial value of 49.7, entering the contraction zone, significantly lower than January's 52.9, marking a new low since January 2023, and at the core of recent significant rise in expectations of US "stagflation". In terms of inflation, both January CPI and PPI exceeded expectations, with long-term inflation expectations of US consumers reaching the highest level in nearly 30 years. The latest inflation expectations for February published by the University of Michigan show that the final value of US consumers' inflation expectations for the 5-year to 10-year period is 3.5%, the largest month-on-month increase since May 2021, and a new high since 1995, as respondents are generally concerned that Trump's tariff hike will lead to price increases. Since the "DeepSeek impact wave" on January 27 that caused a trillion dollars' worth of market value to evaporate, investors have begun to strongly question the rationality of the mega AI investment plans of US tech giants, given the colossal spending of hundreds of billions of dollars, which, compared to DeepSeek's cost in the range of million dollars, has shocked these US tech stock investors tremendously, while also sparking the trend of a historic high market value in China. DeepSeek's emergence has ignited a global wave of funding - including leveraged hedge funds and traditional asset management giants - surrounding China's AI sector, and the fiery market for Chinese technology stocks is expected to drive both Hong Kong and A shares into a long-term bull market. Overall, these factors are undermining the so-called "American exceptionalism," i.e., the belief that the US market will continue to outperform other markets.Extremely angry, they believe that shareholder profits are being constantly eroded by unreasonable expenses, and the prospect of so-called "AI monetization" is becoming increasingly unclear.The European and Asian stock markets present a different prosperous scene. The above statistics show a significant improvement in profit expectations in the European stock market. As for Asia, after the "DeepSeek shock" hit the US tech giants hard, the Wall Street giant Goldman Sachs Group, Inc. has shown enthusiasm for the Chinese stock market. The Chinese stock research team at Goldman Sachs Group, Inc. projects that the widespread adoption of AI in the next decade is expected to increase overall Chinese stock profits by 2.5% annually. Goldman Sachs Group, Inc. has also raised its target points for the MSCI China Index and the Shanghai Shenzhen 300 Index to 85 and 4700 points respectively, indicating around 15% and 20% upside potential for both indices in the next 12 months. Goldman Sachs Group, Inc. expects improved growth prospects and the resulting potential increase in confidence to bring in up to $200 billion in capital inflows into the Chinese stock market. Combining the fading of the so-called "animal spirits" in the US stock market and their accelerated penetration into Europe and Asia, the "double-click" style of rise in European and Asian stock markets seems to be continuing. After soaring over 50% in 2023 and 2024, the S&P 500 index has remained relatively flat since US President Donald Trump took office. Popular trades are now shifting overseas, with investors flocking to European and Asian stock markets, ignoring the 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 contrast, the S&P 500 index has only increased by 0.3% during the same period, with a further 1.7% drop on last Friday dragging down its performance. For traders adopting the same strategy, the logic is simple. Stocks outside the US have missed out on much of the gains of the past two years, and now with global economic prospects stabilizing, these stocks appear relatively cheap. At the same time, the uncertainty of tariffs is intensifying market fears of "stagflation" in the US economy, and the strength of the US dollar and stock market has faded. The success of the Chinese AI startup DeepSeek has led investors to reconsider the high prices of American stocks and make Chinese tech stocks more attractive in the short term. Overall, these factors are shaking the so-called "American exceptionalism", where the US market continually outperforms other markets. "This transition could be long-term rather than cyclical," said Mark Hackett, chief market strategist at Nationwide Investment Management Group, which manages around $750 billion in assets. "Since records began, the only other time there was such a wide performance and valuation gap between the US market and international markets was during the tech bubble. When this transition comes, it comes on strong and lasts a long time." Valuation comparisons clearly show the advantage of European and Chinese stock markets Both fund flows and valuations indicate potential growth opportunities in non-US stock markets, especially in European and Asian stock markets. An analysis by JPMorgan found that excluding Chinese stocks, US stocks have not performed well this year, representing a reversal of 10% to 20% in the dominant pro-US investment theme that has been in place since April 2023. Citigroup stated that investors' holdings have likely shifted "significantly" towards Europe, with investors now more bullish on Europe than on the US. In the past two years, global stock market performance has significantly lagged behind the US stock market, with the STOXX 600 index rising by 20%, the 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 at 14x, much lower than the 22x of the S&P 500 index. The Chinese Dragon Index, after experiencing a significant rise in February, has a price-to-earnings ratio of 17x, still lower than the US stock market. More attractive valuation levels, optimistic investor sentiment following fiscal reform in Germany after the election, and eager anticipation for a ceasefire between Russia and Ukraine all contribute to the flow of funds into European assets. Further valuation comparisons show that despite a 29% surge since 2025, reaching a "technical bull market", the Hang Seng Tech Index is hovering around a price-to-earnings ratio of 17x and a price-to-sales ratio of only 1.1x, lower than its own average level and far below the expected price-to-earnings ratio of 28.2x and price-to-sales ratio of 4.5x of the NASDAQ 100 Index. Although the average price-to-earnings ratio of the US stock market has been higher than that of most Asian markets for over a decade, this "price-to-earnings premium" has now reached its highest historical level. The chart shows that the S&P 500 index's 1-year forward price-to-earnings ratio compared to the valuation premiums of emerging market stock indices, as well as the stock markets of South Korea and Hong Kong, has reached its highest level since LSEG DATASTREAM began tracking data. In the US stock market, despite strong performance in the stock price of Meta, the parent company of Facebook, lackluster performance of other tech giants has led the benchmark stock indices measuring the seven giants, with a high weight in the S&P 500 index and the NASDAQ 100 index (the seven giants account for 30%-40% of the index weight), to be deeply entrenched in a "valuation kill" market, significantly underperforming Chinese tech giants like Alibaba Group Holding Limited Sponsored ADR and the STOXX 600 index in Europe. The lagging performance of the seven tech giants this year is mainly due to the market's concerns about the lack of significant profit return from their massive investments in the field of artificial intelligence and the competition in AI application and AI large-scale model domains with China, in which they are likely to be at a disadvantage. The focus of the NVIDIA Corporation's quarterly earnings report to be released this week will be on the outlook for growth in US AI application demand, especially in AI inference edge demand, due to the huge demand for AI applications.The urgent need for strong AI reasoning computing power is necessary to offset the increased expenses. The current NVIDIA Corporation has not fully recovered from the market concerns about its AI GPU product demand in late January, especially the Blackwell series AI GPU demand being affected by the severe decline caused by the "low-cost impact" of the Chinese chatbot startup DeepSeek of Siasun Robot & Automation. On January 27th, NVIDIA Corporation's market value evaporated by as much as $589 billion, marking the largest market loss in history for the U.S. stock market, with a single-day drop of 17%.The so-called "Magnificent Seven" of the US stock market, which dominate the S&P 500 Index and Nasdaq 100 Index with high weights, include: Apple Inc., Microsoft Corporation, Alphabet Inc. Class C, Tesla, Inc., NVIDIA Corporation, Amazon.com, Inc., and Meta Platforms, the parent company of Facebook. They are the core driving force behind the repeated record highs of the S&P 500 Index. Looking at the entire US stock market, the seven tech giants have been the core force leading the US stock market since 2023, attracting funds from around the world with their strong revenue brought by AI deployment, solid fundamentals, years of strong free cash flow reserves, and expanding stock buyback programs. However, this year, the logic of the seven giants leading the US stock market has fundamentally changed. Apart from Meta, the stock price performance of other tech giants has significantly underperformed the S&P 500 Index, becoming the core negative catalyst dragging down the entire US stock market. Investors are beginning to strongly question whether the high valuations of US tech giants are reasonable, as well as whether their AI competition with China is not as strong. They also doubt if the AI burning money plans of American giants are rational. With the rise of Chinese AI start-up DeepSeek and its leadership in the new "AI large model computation paradigm" focusing on "low cost" and "high energy efficiency," DeepSeek is expected to drive sales and operating profits in Chinese semiconductors, SaaS software, cloud computing, and all industries into a new growth paradigm. This will further enhance global investors' bullish sentiment towards Chinese stocks, especially towards giants that greatly benefit from the demand for inference-side computation power such as Alibaba Group Holding Limited Sponsored ADR and Tencent, cloud giants with powerful AI computation systems.