international Stocks Surge⁣ as U.S. ⁣Market Faces Headwinds

Published: 2025-03-20

President Donald Trump’s “America First” policies are having an unexpected effect: making international markets increasingly attractive to investors. In⁣ 2025, international stocks are⁢ outperforming U.S. equities, marking a significant shift in investor sentiment.

International stocks outperforming U.S.Equities

The iShares MSCI Emerging Markets⁢ ETF (EEM) and the iShares MSCI EAFE ETF‌ (EFA) have rallied more than 7% and 11%, respectively, in​ 2025.‌ Conversely,all three major U.S.averages are down, with the‌ Nasdaq Composite entering correction territory and the S&P ​500 briefly dipping into⁤ one. The small-cap Russell 2000 is nearing a bear market, defined as a fall of 20% or ​more from its⁣ peak.

This surge in interest in​ international equities is largely due to turmoil⁢ in the U.S. stock​ market. Trump’s inconsistent tariff policies have hurt consumer and corporate ⁣confidence,‌ leading investors to question the narrative of U.S.⁤ exceptionalism ⁢and ⁣seek better ​returns elsewhere.

“While U.S. stocks have​ performed well in recent history, investors who remain concentrated within just ​a​ single market may leave⁢ thier portfolios vulnerable to country-specific risks, such as⁣ shifts in political regimes and other idiosyncratic factors.”

Jeremy Folsom,‌ investment strategy analyst ⁤at Wells Fargo ⁢Investment Institute

Folsom added, “We‌ have encouraged investors to remain invested in developed market (DM) equities, given ⁤the attractive valuations, and emerging market (EM) equities, for potential growth. ‍We believe that ⁢both can‍ help‍ to ​provide diversification ⁣to⁣ portfolios.”

Earlier this month, Citigroup downgraded U.S. stocks to neutral from overweight, citing a “pause in U.S. exceptionalism.”

“The ⁢news flow from the U.S. economy is likely to undershoot the [rest of the world] in coming months, and at least tactically, U.S. exceptionalism is therefore unlikely ⁤to ​roar back.”

Dirk Willer, strategist at Citigroup

HSBC and BCA Research have ‌also lowered their outlook on the U.S. market.In January, Bank of⁤ America ​strategist Michael Hartnett cautioned that “U.S. exceptionalism [is] peaking,” citing​ factors such as the decline in ‍excess U.S.⁤ fiscal spending.

Germany ⁣and China Show signs‌ of Economic Revival

the shift in investor focus isn’t solely about negative sentiment towards the U.S. markets previously considered stagnant, particularly Germany and China, are showing renewed vitality. The German DAX​ index has rallied over 15% this ⁢year. Europe’s largest economy is increasing defense and infrastructure spending as Trump signals a potential reduction in commitment to Europe’s defense in ‍the Ukraine war against Russia.

according to NBC News, the Trump management is considering relinquishing NATO command, a role⁢ the U.S.​ has held since Dwight D. Eisenhower.This historic shift could substantially impact the European Union. Investors are hopeful that increased spending will⁣ revitalize Germany’s economy, which⁤ narrowly avoided recession in ⁣2023 and 2024, and benefit the broader continent.

The STOXX Europe 600 has also risen approximately 9% this year, driven ‍by the ⁣rally⁢ in german stocks.

“I think it’ll have kind of a ‍trickle-down effect on the rest of the economy, and then different sectors as well. It will affect consumers, I think, down the line as well, just given how‌ much pressure they’ve been ⁤over the past couple ​years.That’s why⁣ we ‍when we talk to investors, we really advocate for the ETF kind of group approach … as ‌the whole economy should ⁤see these benefits.”

Trevor Yates, senior ⁤investment analyst​ at Global X

China ‍is also experiencing ⁣a resurgence, with attractive valuations and the rise of DeepSeek sparking ‍renewed investor interest in the stock market. The iShares MSCI⁢ China ETF (MCHI) has surged about 21% ⁣this ⁤year, while the iShares China Large-Cap‌ ETF (FXI) has rallied more than 22%. Beijing’s decision to increase​ its⁤ defense spending by 7.2% this year to “firmly ​safeguard” its national security ​is also noteworthy.

Potential Risks and Future Outlook for International Stocks

While international markets show promise, some analysts ⁣suggest waiting for a better entry point after their⁤ recent outperformance.

“We do think that international markets have the potential to do better than the U.S.for much of this year.⁤ That doesn’t mean they’re buys right here and now, but perhaps somewhere, people might want to build some relative exposure ‌into the next downdraft and ⁢develop⁢ global Europe⁣ versus ‍US.”

Katie Stockton, founder of Fairlead Strategies

The possibility that Trump’s tariffs could ⁢be more than‍ just a negotiating tactic has investors concerned about significant shifts in global ⁢relations,​ potentially making the rally in international markets sustainable.

“Three months ago, investors were ⁤convinced that Trump 2.0 would make a bad situation in Europe and⁢ China ⁤even worse. Instead,⁤ Trump has ⁣become a catalyst for big policy​ changes. It is indeed ‍still early days, and ther might potentially be setbacks, but these policy shifts could mark the start of a major realignment in international trade and a genuine rebalancing ​of global demand.”

Dario Perkins, managing director ⁣of ​global macro at TS Lombard

However, a severe downturn in‌ the U.S. economy⁣ could have global repercussions.

“Make​ no mistake – a US recession would bring down ⁣the entire ⁣world.”

Dario Perkins, managing director of global macro ‌at TS⁤ Lombard

Key Takeaways

• International ​stocks are outperforming ⁢U.S. ‌stocks in 2025.
• Turmoil in the U.S. market and Trump’s policies are⁤ driving investors abroad.
• Germany and china⁤ are showing signs of economic revival.
• Policy shifts and realignments in international trade could sustain ⁤the rally in international markets.
• A U.S. recession would have ⁣severe⁤ global consequences.

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