U.S. Market Stumbles: Is It Time to Look Abroad?

Archive edition · Market data and company circumstances reflect 10 May 2025, when this newsletter was sent.

U.S. Markets in 2025: Hype, Hope, or Headwinds?

The global financial markets have had a dramatic and unpredictable start to 2025. What began as a promising year for U.S. markets and technology stocks has quickly turned into a complex and volatile environment for investors.

Shifts in economic data, geopolitics, and market sentiment have forced many to question long-held beliefs about market leadership and where the best opportunities lie going forward.

From Euphoria to Caution in Weeks

U.S. markets started strong but soon priced in recession risks before a recent bounce.

At the start of the year, investors were optimistic. Markets, especially in the U.S., were riding high on expectations of economic growth, deregulation, and tax cuts. U.S. technology companies, which had enjoyed years of dominance, were leading the charge.

But by the end of the first quarter, things took an unexpected turn. Economic data from the U.S. started to weaken, falling short of lofty expectations. On top of that, new competition in the Artificial Intelligence (AI) space from Chinese tech firms rattled confidence in the U.S. tech giants that had been driving the market.

As a result, non-U.S. markets — particularly in Europe and Asia — began to look more attractive. Their valuations were lower, and fresh policy moves in places like Germany and China brought them back into focus for global investors. For the first time in a while, non-U.S. equity markets began outperforming the U.S..

A Presidential Announcement That Shook Markets

In a surprising move, U.S. President Donald Trump made a public statement about ‘Liberation Day,’ which sent shockwaves through the markets. His comments raised concerns about a possible U.S. and global recession.

Until that moment, the U.S. market had been following a pattern typical of a growth cycle — rising steadily as the Federal Reserve eased policy. But after the announcement, market behavior shifted to resemble what typically happens before a recession.

U.S. stocks stumbled, and the fear of recession quickly spread worldwide. Markets that had recently detached from U.S. performance got pulled back down.

Historically, when the U.S. market experiences a drop of 10% or more, it tends to drag other markets with it — and that pattern held true again this time.

A Wild Rally: Relief or a Trap?

On April 9th, a temporary 90-day pause on new tariffs was announced, and it sent equity markets soaring. The Nasdaq jumped over 12% and the S&P 500 nearly 10% — one of the biggest single-day gains ever recorded.

But was this rally the start of a recovery or just a typical ‘bear market bounce’?

Historically, sharp rallies like this are common during bear markets and don’t necessarily signal the bottom. While a quick reversal of tariffs could limit economic damage, current stock valuations remain high, and any further upside appears limited without stronger fundamental support.

Conflicting Signals Keep Traders on Edge

After April’s correction, retail investors rushed to ‘buy the dip,’ just like they have during past volatility spikes. Sentiment indicators showed a modest recovery, though they remain cautious. For instance:

This divergence suggests that while actual performance hasn’t collapsed, underlying sentiment is shaky — a warning sign for potential volatility ahead.

• The Risk Appetite Indicator (RAI), which tracks investor risk-taking behavior, bounced from deeply negative levels but hasn’t fully recovered.
• Soft data (like business and consumer confidence surveys) continues to weaken, while hard economic data (like employment and earnings) has held up for now.

Tariff Tensions Aren’t Over Yet

Investors are hopeful that recent tariff pauses will lead to broader trade deals. However, the reality is more complicated. China and the U.S., which together make up about half the world’s economy, are still locked in a tense trade relationship. New agreements will likely be difficult and drawn-out.

Even without new tariffs, the damage from earlier trade restrictions might have already dented economic momentum.

Goldman Sachs expects U.S. tariff rate to rise by 16pp.

Goldman Sachs economists expect U.S. tariff rates to rise by an additional 16 percentage points — a move that could further strain growth and corporate profits.

One of the biggest challenges facing markets right now is that stock prices, especially in the US, remain expensive despite rising risks.

If economic growth slows or a mild recession hits, corporate earnings could drop by around 10%. In the U.S., if price-to-earnings (P/E) ratios also fall back to more reasonable levels, that could mean a 20% market decline from here.

The problem is, while downside risks are easy to imagine, it’s harder to justify a big upside from current levels — especially with earnings revisions still trending down.

• Cyclicals (stocks tied to economic growth) have become pricey relative to defensives (safer, steady companies).
• While non-U.S. markets are cheaper compared to U.S. stocks, they’re not exactly cheap relative to their own history.

Is Market Leadership Changing Hands?

Since the 2008 financial crisis, the U.S. and its tech giants have dominated global markets. Their profits, margins, and returns on equity have outpaced international competitors. This led to a concentration of wealth in a small group of mega-cap companies and made the U.S. market more expensive.

But several factors now threaten this dominance:

All these trends could erode the profit advantages US companies have enjoyed for years. In fact, by 2024, US stock valuations had already moved well beyond what their fundamentals justified.

• Higher capital costs due to rising government debt.
• New AI competition from China and other regions.
• Regionalisation trends forcing companies to shift production closer to home at higher costs.

Old Investment Rules Making a Comeback

For much of the past 15 years, two core investment principles seemed to lose relevance:

Why? The tech boom, low-interest rates, and US economic strength made concentrated bets on U.S. tech highly profitable.

But now, with interest rates higher, profit growth slowing, and valuations stretched, these old rules are starting to matter again. Market concentration carries significant risk. And the case for diversifying across regions, sectors, and investment styles has rarely been stronger.

• Diversification reduces risk and improves returns.
• Profits and valuations eventually revert to the mean.

What Should Investors Do?

While we don’t expect the U.S. market to enter a prolonged period of underperformance, the gap between U.S. and global market returns is likely to narrow. It won’t necessarily mean U.S. markets will crash — but global opportunities might finally catch up.

• Diversification is back in style. Spread investments across geographies, sectors, and factors.
• Expect more volatility. Economic data and political headlines will continue to sway markets in the short term.
• Watch valuations. Markets are still priced for perfection in many areas, leaving little room for disappointment.
• Focus on fundamentals. Strong balance sheets, reasonable valuations, and consistent earnings growth will matter more in this environment.
• Stay flexible. The structural market leadership that’s defined the last decade is shifting. Stay alert to emerging themes and opportunities.

Archive note

This article preserves the analysis in our weekly newsletter sent 10 May 2025. Market prices, forecasts and company circumstances reflect the time of publication and may have changed.

This material is general information, not personal financial advice or a recommendation to trade. Investing and trading involve risk, including loss of capital.