Trump is making the rest of the investment world great again
Are there more opportunities outside of the US?
Donald Trump campaigned to Make America Great Again (MAGA) but he’s only succeeded in making the rest of the world great again.
At the time of writing, the S&P 500 is down 4% year-to-date, and has fallen 10% from its highs. Meanwhile, the Nasdaq and Russell 200 have fared worse, having both fallen 8% this year and 14% from their highs.
That doesn’t quite reflect the degree of carnage in American markets. The average member of the Nasdaq index has dropped 32% from their highs, while for the Russell 2000, they’ve declined 26%.
Even the once-beloved Magnificent Seven are copping it. Six of the seven are down in 2025, with only Meta in positive territory (update: Meta also went negative as of Wednesday morning). Tesla has trailed the rest, getting whacked 38% this year, to lag every other company in the S&P 500.
The rest of the world is having a better time of it. Developed European markets have risen 13% in USD terms in 2025, with Germany and France leading the way, up 20% and 14% respectively.
China has also found investor favour. It’s jumped 19% in USD terms year-to-date, helping Emerging Markets to a 4% gain this year (tech-laden Taiwan has lagged, as has India).
Reasons for the turnaround
Though Trump is getting the blame for the correction in US stocks, the truth is that he’s just been the trigger for an over-hyped and overpriced US market.
Until recently, America had crushed the rest of the world for 15 years. The S&P 500 returned 14% per annum between 2010 and 2024, compared to the world ex-US return of 5%.
That extraordinary run prompted talk of ‘US market exceptionalism’. The idea being that American companies were far superior to those of other countries, and that would remain the case for a long time.
Some of this talk was justified, given the superior earnings growth of US companies, especially the Magnificent Seven.
However, some wasn’t, as the earnings growth was accompanied by aggressive valuation re-ratings, particularly for the US tech stocks.
It resulted in the US trading at far higher valuations versus international stocks than historical norms.
Given the momentum in US stocks, both institutional and retail investors had piled into the market by the end of last year. US households had their highest exposure to American stocks in decades.
Similarly, institutional investors were ‘all-in’ on America. They effectively had to be by default because any institution that had been underweight the US had been demolished during the previous two years.
Seen through this lens, Trump has been the trigger for the correction, but any number of things could have led to a pullback in US markets.
Trump has poked the European bear
Inadvertently, Trump’s policies could be the catalyst for an economic turnaround in Europe.
From Australia, it’s hard to appreciate the shock that Trump’s protectionist policies have caused in Europe. In early February, the US Vice President JD Vance gave an extraordinary speech to a Munich security conference where he said that the greatest threat to Europe didn’t come from a nuclear-armed Russia currently waging war in Europe, but “from within Europe – the retreat of Europe from some of its most fundamental values, values shared with the United States of America.”
Former UK Prime Minister John Major, a Conservative euro-skeptic, said this after the speech:
“It’s extremely odd to lecture Europe on the subject of free speech and democracy at the same time as they’re cuddling Putin. In Mr. Putin’s Russia, people who disagree with him disappear, or die, or flee the country, or — on a statistically unlikely level — fall out of high windows somewhere in Moscow.”
The Vance speech solidified Europe’s suspicions that the trans-Atlantic alliance, in effect since the end of World War Two, was dead, and even NATO was in trouble.
That meant they needed to rearm to protect themselves, without US help, and fast.
To be fair, they’d already started been doing this since Trump’s first term.
To deter Russia, experts believe that Europe will no need to lift spending on defence from under 2% to 3.5%.
It hasn’t taken long for countries to react. After decades of economic conservatism, Germany is seeking to introduce fiscal stimulus to pay for billions in spending on defence and infrastructure.
The planned infrastructure fund would spend 500 billion euros, or 12% of German GDP, on infrastructure, energy grids, and housing over the next 12 years. This fund alone would lift German and European real GDP growth by about 1% and 0.3% per year, respectively, over the coming decade.
In addition, if EU countries increase their defence budgets by 1.5% of GDP, as has been suggested, this would mean an additional 800 billion euros, or 4.3% of the EU’s GDP. If that’s implemented over the next 10 years, it could lift EU real GDP growth by further 0.3% per year.
All up, the measures could raise the EU’s GDP growth rate from the current 1.6% to 2.1% during the next decade – or towards similar levels to those estimated for the US over the same period.
It’s a gift for China
Meanwhile, China can hardly believe its luck. Trump has upended NATO, put massive tariffs on the supply chains of America’s largest industrial firms, created policy upheaval that’s sent US markets reeling, and frightening consumers into spending less – all of which could quickly send the US economy into recession.
China isn’t too concerned with the American tariffs against it either. Exports are only 20% of its GDP, and exports to America are less than 15% of these exports. Plus, China can find alternative destinations for its goods in Europe, Asia, and Africa.
Meanwhile, its ‘Belt and Road’ strategy may get a second wind as countries would prefer the ‘certainty’ of trade and business deals with China to the uncertainty of dealing with Trump and the US.
The big question for markets is around earnings
Will fiscal stimulus and better economic prospects lead to improved earnings from countries outside the US?
Fund manager, Joachim Klement, thinks they can. He estimates fiscal stimulus could translate to earnings growth of 7% in Europe compared to 6% growth in the US over the next decade.
If right, it would signal a major change in market and earnings leadership away from the US. And, Trump may have just kicked a massive own goal.
