U.S. stocks have underperformed their European rivals this year — and strategists at JPMorgan say it’s just the start.
The Vanguard FTSE Europe ETF
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has gained 17% this year as the S&P 500
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has dropped 4%, though a rally in the cards for U.S. stocks
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on Monday is likely to narrow that differential.
While this year thus far has proved challenging for U.S. assets, their outperformance in the last fifteen years, the era of U.S. exceptionalism, is still dramatic.
However, the locomotives of that outperformance may now be running out of steam. According to JPMorgan strategists led by Mislav Matejka, head of global and European equity strategy, 40% of the alpha – an asset’s outperformance relative to its benchmark – was generated by Magnificent Seven stocks but now that AI is democratizing, this may shrink. U.S. tech is now too big to enjoy secular growth, so is partly dependent on consumer strength. The extent of portfolio concentration here provides grounds for concern, says Matejka.
Additionally, the dollar’s safe haven status is no longer assured. Real interest rate differentials are narrowing, and the Fed’s credibility has been called into question following criticism of Fed Chair Jerome Powell by President Donald Trump. Elevated fiscal deficits reduce the appeal of U.S. Treasurys, and a weaker dollar disfavors U.S. asset markets in favor of international.
The factors informing the underperformance of European markets over this timeframe were energy insecurity, the German debt brake preventing meaningful fiscal support and the slowdown in Chinese import demand.
China’s anemic growth – witness bond yields
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tumbling – is still relevant, but JPMorgan analysts say the trends may be weakening as the China housing market bottoms and material fiscal stimulus develops. German stimulus, however, is “potentially transformational” at 20% of GDP. Falling oil prices in 2025 now provide a tailwind to European consumers and economic growth potential.
After the global financial crisis, U.S. price-to-earnings multiples were broadly in sync with major international peers but now enjoy a premium of 43% vs. developed, as the U.S. weighting of global indices shot up to 70% compared to less than 50% in 2010, they say. Maintaining this premium given the challenges facing the U.S. at present. International markets, though, can claim to be less market sensitive in risk-off periods and may react positively to any improvements in sentiment pertaining to tariffs or ongoing military conflicts, they added.
