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US stocks have underperformed the rest of the world this year by the widest margin in more than three decades as Donald Trump’s erratic policymaking sparks an investor exodus from American assets.
The MSCI USA index — a broad gauge of US equities — lost 11 per cent in the first 16 weeks of the year. The MSCI all world ex-US benchmark climbed 4 per cent in dollar terms over the same period, the biggest gap with Wall Street since 1993, when US investor enthusiasm for foreign stocks surged on the back of trade liberalisation and concerns over the domestic economy.
The gulf in performance underlines investors’ expectation that Trump’s tariff blitz will take a heavier toll on the US economy, by hurting growth and driving up inflation, than it will on economies elsewhere. The gap has been particularly marked with Europe, where US isolationism has prompted pledges of higher government spending — particularly on defence — which are expected to boost the local economy and support equity markets.
“A large part of this underperformance is the repricing of US assets due to increased policy uncertainty and the stagflationary shock from tariffs,” said Sameer Goel, head of emerging markets and Apac research at Deutsche Bank.
The tumbling greenback has helped widen the gap in performance. It has fallen by 8 per cent this year against a basket of six major currencies including the euro and yen, boosting non-US market performance in dollar terms.
Investors started the year betting that US stocks would continue to outshine their peers elsewhere as Trump’s tax cuts buoyed corporate profits. But that view quickly unwound after the US president launched a trade war that was far more aggressive than most investors had anticipated.
The S&P 500 fell as much as 12 per cent in the week following Trump’s “liberation day” tariff announcement on April 2. Although it has since recouped much of those losses as Trump reversed or delayed some of his tariffs, it continues to lag far behind global rivals such as Hong Kong’s Hang Seng or the Stoxx Europe 600.
In Europe, defence stocks such as Germany’s Rheinmetall, Italy’s Leonardo and the UK’s Rolls-Royce have led indices higher, boosted by the region’s plans to increase military spending to cut dependence on the US. Germany’s Dax index is up more than 20 per cent in dollar terms this year while France’s Cac 40 is up around 12 per cent.
“Capital is flowing towards Europe, buoyed by confidence in strong institutions, governance, and equity markets which typically trade at discounts relative to their US counterparts,” said Lewis Grant, senior portfolio manager for global equities at Federated Hermes.
In Asia, the Hang Seng is up 10 per cent this year in dollar terms, led by Chinese tech stocks following the unveiling of AI models by start-up DeepSeek that the company claims were trained at a fraction of the cost and computing power of US rivals such as OpenAI.