This is The Takeaway from today's Morning Brief, which you can sign up to receive in your inbox every morning along with:
-
The chart of the day
-
What we're watching
-
What we're reading
-
Economic data releases and earnings
One of Wall Street's most popular calls in 2025 was for continued US "exceptionalism" in the stock market.
But less than two months into the year, confidence in that trade is waning and the alternate scenario we laid out in December, where the rest of the world outperforms US stocks, is playing out.
In the February Bank of America Fund Manager Survey, 34% of fund managers said global stocks will be leading the asset class this year, followed by 22% listing gold. Meanwhile, US equities dropped to third in the rankings, with 18% saying the asset class will once again lead this year. In January, 27% of respondents had picked US equities to lead.
Bank of America strategist Michael Hartnett wrote in a note to clients this shift shows a "peak in investor conviction of US exceptionalism."
Recent market action bears out this sentiment too. Last week, inflows into European equities jumped to a two-year high, according to Deutsche Bank. For the year, the European STXE 600 (^STOXX) has risen more than 10%, outpacing the S&P 500's (^GSPC) roughly 4% gain.
Strategists have highlighted a few reasons for the divergence that say just as much about the shifting backdrop for US stocks as they do about the European rally. For one, markets have grown less optimistic about Federal Reserve interest rate cuts in 2025 and now only expect a single cut this year.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
As UBS Asset Management's fixed income investment specialists team pointed out in the latest Yahoo Finance Chartbook, those expectations have diverged from those of the Bank of England and the European Central Bank, which still feature far more optimism around rate cuts.
This comes as consensus projections for economic growth show gross domestic product (GDP) increasing in 2025 from the year prior in the United Kingdom and the eurozone. Meanwhile, consensus currently sees the US economy growing at a 2.2% annualized pace in 2025, down from the 2.8% pace seen in 2024.
Additionally, recent economic developments, including a surprisingly weak retail sales report in January, have economists already warning that the first quarter could see weaker economic growth than initially thought.
"There's a bit of a growth issue in the US relative to expectations," Chris Watling, Longview Economics global economist and chief market strategist, told Yahoo Finance's Morning Brief show on Tuesday.