U.S. Stocks Roar Back: Investors Look Overseas

Concerns over trade tariffs and economic conditions caused the S&P 500 and Nasdaq Composite to experience their most challenging quarters since 2022, leading certain investors to seek opportunities abroad as a result of this downturn.

The Trump administration’s inconsistent rollout of a tariff fight With the U.S.'s largest trading partners experiencing changes, analysts are adjusting their predictions for economic expansion downward and increasing their projections for inflation. The technology sector that propelled stock indices to record levels is now losing momentum. This shift has investors concerned. big and small have been moving their bets to Europe—where new expenditure plans might revitalize an sluggish economy—and further abroad.

On Monday, the market experienced significant fluctuations as it has been facing intense pressure over recent weeks. Following a worldwide sell-off during the night, U.S. equities started off substantially down but recovered significantly in the afternoon session, marking the biggest intra-day rebound in just over two years for the overall index.

For the first time in some time, you could discuss whether European equities might be the optimal choice for the coming two or three years," remarked John Porter, chief investment officer at Newton Investment Management, who has recently incorporated numerous European stock purchases into their strategies. "This discussion isn’t solely based on valuations; there are additional factors supporting this view.

The S&P 500 is finding it difficult to climb back up. out of a correction Following a decline of 10% from its peak in February, the turbulent quarter has caused the U.S. stock index to drop by 4.6%, significantly lagging behind the gains observed elsewhere. indexes overseas . The dollar has weakened , causing investors to question whether the retreat from investing in U.S. assets signals the beginning of a prolonged shift in market conditions.

It is quite different from the close of 2024, when the S&P 500 reached its peak. second consecutive year Over 20 percent increases were observed. The decline in inflation enabled the Federal Reserve to reduce interest rates consecutively for three times. Winning the election along with Republican majorities in Congress appeared to forecast upcoming tax reductions, less regulation, and prosperous periods ahead under President Trump’s leadership.

Only a few financial experts would dare predict a period dominated by Europe. However, some are contemplating the idea that after years of average outcomes from the region’s equity markets, there might be a shift towards robust and consistent growth.

Although European stocks have typically traded at lower valuations compared to U.S. equities based on company profits, the region’s underperforming economy and lack of technology-focused businesses had deterred numerous investors.

Currently, as the U.S. has cautioned Europe against assuming its military defense can be taken lightly, Germany along with several nations has declared significant hikes in theirdefense expenditures. defense spending that certain economists believe might kick-start the region’s economy .

Investors are eager to join the frenzy. This year, the Stoxx Europe 600 index has surpassed the S&P 500 by 9.8 percentage points, marking its biggest quarterly advantage over the past six years as per data from Dow Jones Market Data. Within defense stocks In Europe, Rheinmetall from Germany has seen an increase of over twofold, whereas Thales based in France has experienced a rise of 77%.

The Bank of America's March global fund manager survey revealed an unprecedented shift away from U.S. stocks, with a net 23% of participants being underweighted in American company shares. In contrast, confidence in Eurozone equities surged to its peak since July 2021.

To have European stocks outperform in the long run, numerous investors argue that governments should implement business-conducive measures like deregulation. In the previous year, ex-European Central Bank President Mario Draghi suggested wide-ranging changes designed to enhance Europe's efficiency.

At T. Rowe Price, the asset allocation committee prefers international equities over domestic ones when considering the upcoming six to twelve months, according to Sébastien Page, who leads global multi-asset strategies and serves as the chief investment officer. However, Page, managing over $550 billion at the firm, does not predict a fundamental long-term change in market dynamics.

Long-term, I believe that the supremacy of U.S. technology will persist," he stated. "It’s not wise to discount the resilience of U.S. tech.

In recent years, major U.S. technology companies have been driving the stock market upwards. From the close of 2019 until now, Nvidia’s share price has surged over 1,700%, whereas Apple's has climbed approximately 200% and Microsoft's around 140%. In comparison, during this period, the S&P 500 index rose by 74% and the Stoxx Europe 600 increased by just 24%.

Recently, the major technology companies have experienced a downturn. Nvidia, which was at the forefront of the artificial intelligence revolution, faced setbacks following the events in January. AI model From a Chinese firm called DeepSeek, which seemed to compete with Western alternatives despite employing less sophisticated processors. This year, its stock has declined by 19%, whereas Apple and Microsoft have each dropped approximately 11%.

So far this year, most sectors within the S&P 500 have shown gains. Industries known for their stability during economic declines—like healthcare, consumer staples, and utilities—are up. However, financial stocks, which heavily reflect the state of the overall economy, have also seen increases.

Nevertheless, investors' anxiety continues to be apparent. Gold, viewed as a refuge during difficult times , has surged by 19% this year, marking its largest quarterly increase since 2011, and is currently hitting all-time highs. Meanwhile, investors concerned about the economic landscape have been purchasing Treasury securities, causing the yield on the key 10-year note to drop to 4.245%, compared with 4.577% at the close of last year.

While consumer sentiment has declined, yet the job market has stayed reasonably strong and retail sales Rose gently in February. Numerous investors believe the economy may keep progressing smoothly—particularly if the U.S. establishes a clear trade policy, allowing companies to strategize their future steps.

If this ambiguity persists for an extended period, many individuals might choose to do nothing, postponing decisions regarding annual capital budgets, projects, and staffing," warned Tiffany Wade, a senior portfolio manager at Columbia Threadneedle Investments. "This inaction could lead to significant adverse effects on the economy.

Send your letter to Karen Langley at karen.langley@wsj.com