US stocks and the US dollar are both encountering a cold front, is the "American exceptionalism" halo fading?

At the beginning of this year, investors generally bet that the policies of US President Trump would drive the US stock market and the US dollar to stand out in the global market. However, this expectation seems to be facing increasing challenges. Trump's reforms to the government and large-scale initiatives in trade and other policies have not only failed to bring confidence to investors, but have injected uncertainty. Consumers and businesses are concerned about the economic outlook, threatening the narrative of American exceptionalism. Garrett Melson, Portfolio Strategist at Natixis Investment Managers, said, "Policy uncertainty is leading to a dynamic... investors, business leaders, and consumers are starting to tighten spending." He added, "Behind this is the fact that, aside from all the noise around policies and the Trump administration, the US economy has been on a cooling path." Furthermore, in recent years, the US large technology and growth companies that have largely driven the market's gains have stumbled due to concerns about valuations and China's low-cost artificial intelligence model, DeepSeek. An ETF tracking the so-called "Fab Seven" group has fallen over 10% since its peak in mid-December last year. Although a key member of the "Fab Seven" group, NVIDIA Corporation (NVDA.US), gave better-than-expected revenue guidance for the first quarter in its earnings report on Wednesday, the outlook for profit margins was slightly lower than expected, which could set the tone for the US stock market on Thursday. US stocks and the US dollar both face headwinds Entering 2025, the US stock market and the US dollar were widely expected to outperform their foreign counterparts. However, this year, the US benchmark S&P 500 index has only risen by a little over 1%, while the MSCI index covering stocks from over 40 countries has risen by around 7%, and the US dollar has fallen by about 3% against a basket of major currencies since its peak in January. This performance difference is partly due to developments outside the US, including surprising economic data in Europe and the emergence of China's artificial intelligence model, which has shaken the tech sector that dominates the US stock market. Meanwhile, recent soft indicators for consumers and businesses, along with announcements from the Trump administration on trade policies and government layoffs, have heightened concerns about the US economic growth outlook. Signs of concern about the US economy emerged over the past week, including data released on Tuesday showing the fastest drop in consumer confidence in over three and a half years in February, and another data point showing consumer sentiment falling to a 15-month low. A survey released last Friday also showed that business activity fell to a 17-month low, almost stagnating in February. These economic reports may give investors more reason to allocate to international assets, as valuations of these assets become increasingly cheaper compared to the US. For example, according to data from LSEG Datastream, the premium of the S&P 500 index relative to the MSCI index for non-US stocks reached its highest level in over 20 years at the end of 2024 based on price-earnings ratios. Paul Nolte, Senior Wealth Advisor and Market Strategist at Murphy & Sylvest Wealth Management, who had already allocated more of his global equity portfolios to non-US stocks at the beginning of this year, said, "People have been expecting the US (economy) to continue to perform well. So if there are problems there, then some of the overvaluation in the US may need to come down to levels closer to the rest of the world." Charlie McElligott, Director General of Cross-Asset Strategy at Nomura Securities, said in a report on Monday that recent soft US economic data has led investors to increasingly raise the probability of a "growth scare" scenario. He said investors seem to be "realizing" the impact of the initial policies of the Trump administration and starting to consider more serious growth drag than initially implied by post-election narratives. Other indicators may also reflect a more subdued outlook for businesses. A survey by the National Federation of Independent Business in January found that the proportion of small businesses planning capital expenditures in the next six months fell to its lowest level since November of last year before the election. Data from Dealogic shows that despite expectations of a more business-friendly regulatory environment for mergers and acquisitions, the value and total number of US deals announced in the first two months of 2025 were down about a third from the same period last year. In a report on Tuesday, BBH strategists said, "Another one or two months of weak US economic data could hit the narrative of American exceptionalism and pose downside risks to the US dollar." European stocks soar European stocks have broadly surged at the beginning of this year, with the pan-European STOXX 600 index rising by 10% so far in 2025. Michael Rosen, Chief Investment Officer at Angeles Investments, said that recently, European companies' profit growth has exceeded expectations more than in the US. Rosen said that for most of the past 15 years, his company has been "actively overweight" in the US stock market, but in the short term, they will be shifting more towards European stocks. Rosen said, "There is more evidence that the very strong economic performance we've seen in the US is starting to fade." Keith Lerner, Co-Chief Investment Officer at Truist Advisory Services, said that in fact, the trade of American exceptionalism post-election is "overcrowded," paving the way for at least some reversal at the beginning of this year. No doubt about the leadership of the "Fab Seven" However, for many investors, despite the shaky start for US assets, they may not be giving up on trading. Although the US economy is showing signs of weakness, many investors believe that the short-term risk of a recession is still low, and the economic benefits of Trump's policies may emerge later this year. Investors say that if the US economy does indeed falter, this weakness may spread elsewhere at some point. Nolte said, "If the US economy does indeed falter, then this weakness may spread to other areas." He added, "Investors need to carefully monitor the market and make adjustments based on macroeconomic data and policy changes.""If the United States catches a cold, the rest of the world will also be infected with the flu." "The seven giants" are considered by many investors to be more able to resist economic weakness than other industries, which may support the U.S. market during the global slowdown.Osaic's Chief Market Strategist Phil Blancato said, "The stock prices of the 'Big Seven' are not cheap... but their leadership is unquestionable."