Subverting expectations! Decline of the "American exceptionalism" helps international stock markets historically outperform US stocks

One year ago when Trump won the US presidential election, investors generally believed that Trump's promises of imposing tariffs on other countries and cutting taxes domestically would lead to international stock markets underperforming compared to the US stock market. However, in the year since then, global investors are flocking to international stock markets instead. In the first year of Trump's second term, a rare reversal in long-term trends has occurred - since he won the US presidential election, benchmark stock indices in China, Europe, and Canada (measured in US dollars) have all outperformed the S&P 500. The MSCI global stock market index, excluding the US, has shown its best relative performance against US stocks since 2009, and yesterday's sell-off triggered by valuation concerns did not change this pattern. US stocks lagging behind international stock markets Since Trump's victory last year, investors have continued to pour money into global stock markets. Initially, this was to hedge against the volatility in US stocks caused by Trump's tariff policies. Subsequently, they began looking for lower valuation alternatives to replace the S&P 500 index, dominated by overvalued tech stocks. At the same time, the weakening US dollar made the dollar-denominated returns in international stock markets look more attractive. Florian Allain, fund manager at Paris-based Mandarine Gestion, said, "Strategists at the time had a clear consensus that Trump's policies would have a brutal impact on global stocks, but that turned out not to be the case. One big surprise this year is that the falling dollar and the headwinds from tariffs are gradually being absorbed." This performance also confirms the predictions of a few strategists, including Peter Oppenheimer of Goldman Sachs and Michael Hartnett of Bank of America, who foresightedly advised investors to look beyond the US market as early as 2024. Michael Hartnett stated that although US corporate earnings growth remains strong and bond yields are declining, the outperformance of international stock markets may slow down, but he remains bullish on overseas markets. He pointed out that as the "American exceptionalism" gradually fades, investors are likely to further redirect funds toward international stock markets in the second half of the year. Strong performance in Asian stock markets The strong performance of Asian stock markets has been driven by the region's central role in the artificial intelligence (AI) supply chain. The region is home to major chip manufacturers, wafer fabrication plants, and semiconductor equipment giants such as TSMC, Samsung Electronics, and Tokyo Electron. The South Korean KOSPI index has soared by 55% in the past year, making it the best-performing index in major economies. However, as valuations have reached high levels, whether the next phase of the uptrend can continue will depend on whether companies can prove that their AI investment expenditures tangible gains, and whether capital expenditure trends can continue until 2026, as well as on whether Trump will continue to take a cooperative stance on trade issues with China. Xin-Yao Ng, fund manager at Aberdeen Investments, said, "After such a strong rally, I wouldn't be surprised if there is a correction in the stock market at the end of the year. The market has been driven by momentum, and some funds may want to lock in gains before the end of the year. I believe there is still room for growth, but it is hard to say how long it will last, and the risks are definitely increasing." It is worth noting that several CEOs from Wall Street asset management firms recently stated that investors should prepare for a healthy market correction of over 10% within 12 or 24 months and described such an adjustment as a positive development signifying the start of a bear market. Mike Gitlin, President and CEO of Capital Group, stated that corporate earnings performance is indeed very strong, but "the challenging part is that valuations are indeed too high." When asked whether the overall value of the stock market is cheap, fair, or leaning towards expensive, Mike Gitlin said he believes most people "would say that our market is somewhere between fair and expensive, but I don't think many investors would confidently say it's between cheap and fair, that's pretty much the reality." Ted Pick, CEO of Morgan Stanley, and David Solomon, CEO of Goldman Sachs, expressed similar views. They also believe that there may be significant sell-offs in the coming period and pointed out that pullbacks are a normal feature of market cycles. US stock valuations remain high Nevertheless, international stock market valuations are still lower than US stocks. If the optimism about AI continues, the stock markets of South Korea, China, and Taiwan are expected to continue to lead the global stock market pack. Meanwhile, the situation in Europe is better than expected. Economic indicators are improving, inflation is under control, and the European Central Bank has lowered interest rates to 2% - far below the levels of the US benchmark rate. In addition, the EU, particularly Germany, is increasing defense and infrastructure spending for the next decade, the effects of which are expected to begin to show by the end of this year. This boost to European stocks includes financials, defense, and energy transition stocks. In addition to loose fiscal and monetary policies, European companies have weakened the impact of tariffs through measures such as price increases, cost-cutting, and direct trade negotiations with the Trump administration at the industry or company level. The US has imposed 15% tariffs on goods imported from the EU, 10% on goods from the UK, and 39% on goods from Switzerland, as well as imposing special taxes on industries such as steel. However, in many cases, the actual damage from tariffs is lower than initially indicated. Florian Allain said, "Europe's situation in 2026 is not bad. Looking ahead, I expect Germany's stimulus plan to drive accelerated growth in Europe, which will to some extent narrow the growth gap with the US." Despite being the European country hit hardest by US tariffs, Swiss exports to the US rebounded in September, indicating that demand has weathered the impact. In addition, pharmaceutical companies Novartis and Roche have negotiated lower drug prices with the US government and committed to investing billions of dollars to mitigate the imminent industry tariff threats. British peer AstraZeneca also reached an agreement with the US government in October. However, as investors have mostly avoided exporters and defensive stocks, the Swiss stock market has performed poorly this year, rising only 6.2%, while the Euro Stoxx 50 index has risen by 15%. Global profit growth In Canada - a country that Trump once claimed should be annexed as the 51st state through "economic power" - investors were fearful after the election. Philip Petursson of IGM Wealth Management said that due to high economic uncertainty and expectations of punitive tariffs, his company took a defensive stance and underweight stocks as they entered 2025. However, since Trump abandoned his toughest tariff threats in early April, the Canadian stock market has seen strong gains. The S&P/TSX Composite Index has risen by 23% since Trump's election victory and is poised to outperform US stocks within a rising cycle for the first time since 2010. Philip Petursson increased holdings of Canadian and other international and emerging market stocks in April. He said, "Earnings growth here will be as strong as in the US, but at a better price." "I can get the same earnings growth potential at two thirds the price-earnings ratio of the S&P 500 index." US profit dominance may be challenged Emerging market stocks have risen by about 30% so far this year. In addition to Asian stock markets, another standout performer is the Brazilian stock market. Data shows that the Brazilian stock market has soared by 44% in US dollars, with the country's benchmark Ibovespa index repeatedly hitting new highs. Expectations of global and local rate cuts have driven the rise in the Ibovespa index, attracting over $4 billion in foreign investment into the Brazilian stock market. Ariane Hayate, fund manager at Edmond de Rothschild Asset Management, said, "It is comforting to see that companies have adapted quickly to tariffs, with many companies quickly announcing plans to move production to other countries or to the US."