Investors Sour on US "Exceptional" Stock Run, Shift to Global Equities
The highly anticipated US stock market "exceptionalism" is fading, with a growing consensus among fund managers that the global equity market will outperform the US in 2025.
According to the Bank of America Fund Manager Survey, only 18% of respondents believe US stocks will lead this year, down from 27% in January. Meanwhile, 34% believe global stocks will lead, followed by 22% who see gold as the top performer.
This shift in sentiment is supported by recent market action. Inflows into European equities surged to a two-year high last week, with the STXE 600 outperforming the S&P 500.
Strategists cite several factors behind this divergence. Firstly, expectations for Federal Reserve interest rate cuts have diminished, with only one cut now anticipated in 2025. In contrast, the Bank of England and European Central Bank remain more optimistic about rate cuts.
Additionally, economic growth projections have tempered in the US, with consensus now expecting GDP growth of 2.2% in 2025, down from 2.8% in 2024. Weak economic data, such as disappointing retail sales, has further fueled concerns about slower growth in the first quarter.
"There's a bit of a growth issue in the US relative to expectations," said Chris Watling, global economist and chief market strategist at Longview Economics.
Investors are also recognizing that US equity valuations have reached historically high levels. This, coupled with stretched investor positioning, is making foreign markets and sectors that underperformed in 2022 appear more attractive.
In summary, investors are rotating away from US stocks and towards global equities and undervalued sectors, as the belief in US "exceptionalism" wanes.