February 17, 2025

QuickTakes

MARKET CALL: Unexceptional Performance

Of US Stocks So Far In 2025

US stocks haven't been exceptional since Donald Trump won the presidential election on November 5, 2024. That's if the performances on the major country MSCI stock market indexes are measured in local currencies (chart). So far, Trump's tariff turmoil seems to be weighing more on the US, Canada, Mexico, and many other emerging markets than on China and most European countries. That could change once reciprocal tariffs are actually imposed by the US in early April, unless Trump changes his mind, again.

Let's consider why this relative performance alignment may be happening and whether it will continue:

(1) China. The Chinese government is trying to boost its economy and stock market. The easing package announced since late September of last year has spanned monetary and fiscal policy as well as property and equity markets. Stock valuation multiples remain low, especially relative to those in the US and also India. Global investors have recently rebalanced their portfolios by reducing their exposure to India and increasing it to China.

Recently, the Chinese government has been actively reaching out to entrepreneurs to bolster confidence in the private sector. Today, President Xi Jinping held a high-level symposium with prominent business leaders, emphasizing the government's unwavering support for the private economy. This meeting, the first of its kind since 2018, aimed to reassure entrepreneurs amid economic challenges and regulatory pressures. Stock market investors are reacting well to this latest outreach (chart). In addition, DeepSeek may be stimulating an AI frenzy in China now too.

(2) Europe. The MSCI stock price index for the European Monetary Union has soared to new record highs over the past few days (chart). We didn't expect that given the domestic economic and political challenges that the bloc is facing. But valuation multiples have been low, and the ECB is lowering interest rates. Chatter about a possible ceasefire in the war between Russia and Ukraine sent Germany's DAX higher today. The euro jumped to $1.05, while the dollar index slumped. European defense stocks rose in response to the Trump administration’s calling on European nations to spend more on their own defense.

The European Union plans to invest €50 billion to support the development and application of artificial intelligence, Commission President Ursula von der Leyen announced on Tuesday, saying that European AI innovation needs to be "supercharged."

(3) Stay Home or Go Global? A Go Global investment strategy has outperformed the Stay Home alternative so far this year (chart). We've been recommending the latter (i.e., overweighting the US in global stock portfolios) since 2010. We acknowledge that there might be more upside for the outperformance of China and Europe, for now.

However, the forward earnings of the US MSCI stock price index continues to outpace that of the All Country World ex-US MSCI stock price index (chart). The trend is our friend, and suggests that Stay Home is the way to go for long-term investors.

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