Global equities last week posted declines for the third week running, falling 1.8% in local currency terms. A recovery in the pound against a weak dollar to $1.29 left markets down a rather larger 3.6% in sterling terms. Markets are now little changed year-to-date, up slightly in local currency but down slightly in sterling terms.
Last week’s declines were very much led by the US, which was down as much as 5.7% in sterling terms versus little change for the rest of the world. The S&P 500 has basically now reversed all of its gains since the US election and underperformed other markets by as much as 10% since the start of the year.
So why the abrupt change of fortune for the US? The starting point has to be its high valuation. This had become even more excessive by the start of the year with its price-earnings ratio as much as 70% higher than the rest of the world. Valuations were buoyed by the belief both that the Magnificent Seven were only becoming more magnificent and that the incoming Trump Administration would only increase US exceptionalism.
Both assumptions are now being called into question. The arrival of DeepSeek, along with some mixed earnings results, has left the Magnificent Seven looking rather less exceptional. As for Trump, the worry is that the positive aspects of his agenda – namely tax cuts and deregulation – seem to be on the backburner while all his focus (a bit of a misnomer in this case) is on the more contentious bits.
The hope had been that Trump’s bark on tariffs would be worse than his bite but recent actions suggest this is not the case. A 20% tariff hike has been imposed on China, along with 25% tariffs on Canada and Mexico although their scope has changed by the day. And more tariffs are on the way. 25% tariffs on steel and aluminium imports are due to start this week and hefty tariffs on Europe, as well as ‘reciprocal’ tariffs on countries more generally, are set to be announced on 2 April.
The problem is that these plans, along with all the uncertainty caused by the constant changes, is slowing activity in the US as well as elsewhere. Government lay-offs resulting from the efficiency drive of Musk’s DOGE are also now becoming a drag.
Far from US growth picking up, as had been expected, the concern now is that growth could slow sharply. It had been thought that a decline in US stocks would reign in Trump’s more damaging policy inclinations but he seemed to accept last week that some economic pain might be needed to achieve longer term gain.
Still, last week’s crop of data provided some reassurance that US growth will most likely only slow to 1.5-2% from the 2.5-3% pace of the past year. Friday’s numbers showed payrolls continuing to grow in February, albeit at a more moderate pace, and business confidence also stabilised last month.
Fed Chair Powell certainly did his best on Friday to appear unphased by recent developments, stating that the economy remains in a good place and the Fed is in no hurry to cut rates. Even so, the market has upped its expectations for rate cuts and is now pricing in three 0.25% reductions later this year.
One final important reason why the US has been underperforming is that Trump’s actions are galvanising other countries into action long overdue, which is now being welcomed by the markets. In Germany, Chancellor-in-waiting Merz has all but secured agreement for a big rise in spending on defence and infrastructure. This should boost German growth significantly over the next couple of years.
Just as it doesn’t take much bad news to trigger significant declines in expensive markets, good news can lead to outsized gains in cheap markets. German stocks are up as much as 17% so far this year versus a 5% decline in the US, and Eurozone equities have now recovered all their underperformance last year. Continued policy easing by the ECB remains supportive with rates cut last week a further 0.25% to 2.5%.
Chinese equities, however, have done equally well this year, gaining a further 3.4% last week to be up 15% year-to-date. The good news here was that the authorities kept their growth target at around 5% for the conming year and announced further stimulus plans, including a pledge to ‘vigorously boost’ consumption.
This week we have focused on the factors behind the recent US underperformance. Next week, we will explore how much further it could have to run.
In the meantime, over the coming week, tariffs will once again be a focus for markets. So too will the US inflation data on Wednesday and US attempts to pass a funding bill to try and avert a government shutdown on Friday. UK GDP data are also out on Friday.
Rupert Thompson – Chief Economist