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US stocks have been trailing behind the global market this year by the largest margin in over thirty years due to Donald Trump’s unpredictable policies causing investors to move away from American assets.
The MSCI USA index saw an 11% decline in the first 16 weeks of the year. In contrast, the MSCI all world ex-US benchmark increased by 4% in dollar terms during the same period, marking the biggest difference with Wall Street since 1993 when US investors showed a strong interest in foreign stocks influenced by trade liberalization and concerns about the domestic economy.
This performance gap highlights the belief among investors that Trump’s aggressive tariff policies will have a more negative impact on the US economy, leading to decreased growth and increased inflation compared to other economies. The contrast is particularly evident with Europe, where US isolationist actions have prompted commitments to higher government spending, especially in defense, which are expected to boost the local economy and support equity markets.
“A significant portion of this underperformance is due to the reevaluation of US assets as a result of heightened policy uncertainty and the stagflationary effects of tariffs,” said Sameer Goel, head of emerging markets and Apac research at Deutsche Bank.
The weakening US dollar has further widened the performance gap. It has depreciated by 8% this year against a basket of major currencies such as the euro and yen, contributing to the stronger performance of non-US markets in dollar terms.
At the beginning of the year, investors were optimistic that US stocks would continue to outperform global peers thanks to Trump’s tax cuts boosting corporate profits. However, this sentiment quickly changed after Trump initiated a trade war that was more aggressive than anticipated by most investors.
The S&P 500 experienced a 12% decline in the week following Trump’s tariff announcement on April 2. While it has partially recovered since then as Trump backtracked on some tariffs, it still lags behind global counterparts such as Hong Kong’s Hang Seng or the Stoxx Europe 600.
In Europe, defense stocks like Germany’s Rheinmetall, Italy’s Leonardo, and the UK’s Rolls-Royce have driven index gains, supported by the region’s plans to boost military spending and reduce reliance on the US. Germany’s Dax index has risen by over 20% in dollar terms this year, while France’s Cac 40 is up around 12%.
“Investment is flowing towards Europe, fueled by confidence in strong institutions, governance, and equity markets that typically trade at discounts compared to US counterparts,” said Lewis Grant, senior portfolio manager for global equities at Federated Hermes.
In Asia, the Hang Seng has seen a 10% increase in dollar terms this year, led by Chinese tech stocks following the introduction of AI models by start-up DeepSeek that claim to have been trained at a lower cost and computing power than US competitors like OpenAI.