US Stocks Lose Favor as Global Outperformance Gains Traction

In the 2025 market outlook, Wall Street analysts anticipated continued "US exceptionalism" driving stock market growth. However, confidence in this forecast has dwindled within the first two months of the year.

According to the Bank of America Fund Manager Survey in February, the narrative is now shifting towards international outperformance. Global stocks (34%) and gold (22%) topped the list of preferred asset classes, while US equities fell to third (18%). In January, US equities were the leading choice for 27% of respondents.

Analysts attribute this sentiment shift to the waning optimism over Federal Reserve interest rate cuts in 2025. The market now anticipates only one rate cut this year, while the Bank of England and European Central Bank remain more optimistic.

This change aligns with economic growth projections showing an uptick in GDP for the UK and eurozone in 2025. Meanwhile, the US economy is expected to grow at a slower 2.2% annualized pace.

Recent economic data, including a weaker-than-expected retail sales report, suggests that the first quarter may experience slower growth than initially forecast. As a result, investors are adjusting their expectations, recognizing the potential for better growth opportunities outside the US.

Market valuations and investor positioning also play a role. US equity valuations have surged to historical highs, making alternative markets appear more attractive. According to Tom Becker of BlackRock, some positioning indicators indicate that US stocks may be overstretched.

As a result, investors are seeking returns in "unloved foreign markets" and sectors that underperformed in 2022, such as Materials and Energy. Notably, cash allocations remain near a 15-year low, indicating that investors remain active in the market.

In conclusion, the consensus on US exceptionalism is fading as global markets emerge as strong contenders for growth and returns in 2025. Investors are diversifying their portfolios and seeking value beyond the traditional US-centric investments.