(Bloomberg) -- Across financial markets, America is no longer first.
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Just weeks ago, investors were hailing Donald Trump’s return to the White House as a reason to bet that his blend of tax cuts and tariffs would supercharge economic growth, in turn boosting US stocks and the dollar at the expense of international peers. The so-called Trump trades were on.
Now that mood has quickly soured. The president’s on-again-off-again trade war, aggressive posture toward Ukraine and a wave of Elon Musk-driven government cuts have united with a suddenly weakening economy to undermine sentiment. The Trump bump is now the Trump slump.
Accelerating the shift away from US assets: Germany’s plan to massively increase spending, announced last week, is being lauded as a sea change in European policymaking, lifting the region’s stocks, currency and government bond yields. Meanwhile, the emergence of AI startup DeepSeek in China is raising questions about America’s supremacy in the tech sector.
Add it all up, and the aura of US economic and market exceptionalism, which dominated for more than a decade, is looking shaky.
The once-unstoppable S&P 500 Index, less than a month removed from a record high, just logged one of its worst weeks of underperformance relative to the rest of the world this century. The US share of world market capitalization has also slipped since peaking above 50% early this year.
Elsewhere, the dollar has started to weaken after posting its best quarter since 2016, and a chorus of bearish voices toward the greenback is expanding. That’s happened as Treasury yields have tumbled on bets that the economy is stumbling and will require more support from the Federal Reserve.
“For the first time you are getting compelling arguments to invest elsewhere,” says Peter Tchir, head of macro strategy at Academy Securities. “That’s been a shift. America was the only game in town and capital flows came here without much thought, and that might be reversing or at least changing.”
The rotation has been apparent to start the year. The S&P 500 is badly trailing European benchmarks, not to mention Hong Kong’s Hang Seng Index, which is up roughly 20%.
On top of that, the US economy has gone from seemingly unshakable to a source of worry. Jobs data Friday painted a mixed picture, but JPMorgan Chase & Co. economists said in a note to clients after the release that they see a 40% chance of recession this year “owing to extreme US policies.”
Treasury Secretary Scott Bessent, for his part, is warning of a “detox period” as the administration shifts the basis for growth toward the private sector.
Of course, investors would write off the US at their peril. In a market that’s increasingly been driven by social-media posts from the president and updates from a handful of trillion-dollar companies, sentiment can shift on a dime. After all, it took just about three weeks for the S&P 500 to regain all-time highs after the DeepSeek impact hammered markets in January.
But as long as investors are dealing with whiplash from the White House and uncertainty over America’s tech dominance, they have a growing list of reasons to look outside US markets.
“American exceptionalism will remain but it’s certainly taking a major hit,” said Troy Gayeski, chief market strategist at FS Investments.
Following is a breakdown of how various asset classes have fared in 2025 and the outlook for the coming months:
Equities Alternatives
The shifting investment thesis goes deeper than US politics or uneven economic data. New and old competitors are luring money managers wary of US megacap stocks while valuation multiples are under the microscope.
At the head of the pack, the Hang Seng Index is trouncing other major equity benchmark to start the year, led by tech giants like Alibaba Group Holding Ltd. and BYD Co Ltd., as investors bet that Chinese tech companies can shake off years of underperformance. China’s efforts to boost its economy and support tech companies are feeding into the strength.
Take BYD, for example. The carmaker outsold Tesla Inc. in several European markets early this year as consumers shunned models from Musk’s company. While Tesla shares have lost more than a third of their value in 2025, BYD’s Chinese-listed stock has soared more than 25%.
Tesla’s slide has helped drag the so-called Magnificent Seven tech behemoths down a collective 11% this year. The tailspin has coincided with Germany’s DAX Index hitting an all-time high as defense stocks from Rome to Paris and European steelmakers rallied amid the changing policy backdrop.
The Stoxx Europe 600 Index is still markedly cheaper than the S&P 500 on an earnings basis. What’s more, some key US company results have disappointed, dimming the fervor around some of the past year’s big winners.
These forces are unlikely to permanently knock the US from its perch as the biggest and most robust market, according to Daniel Skelly, head of Morgan Stanley’s Wealth Management Market Research & Strategy Team. But, he says, the current shift may have room to run.
“Could that rotation continue for the next six months or even the next 12 months? Absolutely,” he said.
Dollar Fade
The world’s primary reserve currency is now almost 4% below the post-election peak it reached in January. The slide accelerated last week, pushing the Bloomberg Dollar Spot Index to its lowest since early November.
The moves in European markets were a big driver. As German benchmark yields rose to the highest since 2023, the euro gained nearly 5% last week for its best run since 2009. A European Union committed to deep and lasting fiscal stimulus is likely to drive the euro even higher, say Deutsche Bank AG and JPMorgan.
The derivatives market illustrates the big swing in sentiment. Demand for hedges against dollar gains is cratering, while options traders are near the most bullish on the euro in more than four years.
“We’re moving towards US normalism, which will be supportive for non-US assets,” said Alvaro Vivanco, head of strategy at TJM FX. “I am comfortable keeping long FX and rates positions outside the US.”
Narrowing Gap
A major ripple effect of the past week’s developments in Europe is that the persistent US yield premium over Germany has shrunk abruptly, to the slimmest since 2023, potentially undermining the relative appeal of Treasuries.
The gap was already shriveling to start the year as angst around the American economy pushed Treasury yields lower, but the move gained momentum in recent days.
There’s some doubt that German yields can rise much more, given all the uncertainty around Europe’s growth and inflation outlook. But for now, the move is underscoring the diverging trajectories of the two markets.
For international investors, there’s another consideration when assessing whether to allocate to US debt: volatility. A widely watched measure of US rates turbulence has surged to the highest since the day after the US election.
Owning long-duration US Treasuries is “normally a safe haven,” said Monica Defend, head of the Amundi Investment Institute. “Now it’s a tactical trade because Treasuries have been so volatile.”
She argues that gold and the yen offer investors better shelter.
Credit Impact
All of these forces are working to the detriment of US companies, who may have a harder time attracting European buyers when they sell debt.
Those investors make up more than half of the overseas buyers of US corporate bonds, according to JPMorgan. With European yields rising relative to those in the US, demand from these buyers may suffer, although Asian investors could pick up some slack.
The cost of hedging back into euros has also climbed, further weakening the case for European money managers to favor American company obligations.
--With assistance from Elena Popina, Matt Turner, Caleb Mutua and Esteban Duarte.
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