US Stocks Regain Ground Against European Markets
After initial investor hesitancy following President Donald Trump's tariff announcements, U.S. stocks are demonstrating a strong rebound, challenging the prior dominance of European markets. Major U.S. indices are achieving new record highs, signaling a potential shift in investor sentiment.
Market Performance Comparison
The S&P 500 has risen 13% year-to-date, while the Nasdaq has increased by 17%. This is a significant jump from late June, when both indices were up by only 5%. In comparison, the DAX in Germany is up 19% this year, a decrease from its 20% gain in June. The FTSE 100 in the U.K. is up 13%, compared to 8% in June, and the MSCI Europe stock index has increased by 25% year-to-date, up from 21% in June. The Hong Kong’s Hang Seng Index has soared 32% this year, up from its 21% year-to-date gain in June.
Shifting Investor Sentiment in Europe
Investor sentiment towards Europe has noticeably changed. Concerns are growing regarding the deficit outlook in both the U.K. and France, coupled with persistent subdued economic growth. Hopes for substantial government spending and deregulation have not yet materialized.
“Outside Germany, investors appear frustrated with the lack of progress: there are no signs of the German government turning on the spending machine,” analysts at Deutsche Bank said in a note on Wednesday. “This has fuelled concerns that the government is dragging its feet, and perhaps wavering in its commitment, on implementing the promised defence and infrastructure spending spree.”
While Deutsche Bank analysts anticipate a future "sugar rush," they express reduced optimism regarding long-term growth prospects.
Factors Fueling the US Market Surge
The U.S. markets have been boosted by several factors including bullishness on the AI revolution, moderation in Trump’s trade war, strong corporate earnings, continued GDP growth, consumer resilience, tax cuts, and the Federal Reserve’s return to easing.
The Federal Reserve's Role
U.S. stocks may receive additional support from the central bank, potentially narrowing the gap with European markets further. On Wednesday, the Fed implemented its first rate cut since December. While some on Wall Street interpreted Chairman Jerome Powell’s press conference as hawkish, others see it differently.
Citi Research economists view Powell's message as more dovish, stating that the effectiveness of the rate cut comes from "the market pricing-in further cuts."
Historical Impact of Rate Cuts
JPMorgan equity strategists highlighted that the S&P 500 has historically gained an average of 26.5% in the second year of an easing cycle, assuming no recession, compared to a 13.7% gain in the first year. They add that the market has already outperformed its typical first-year gain, climbing 17.6% since the Fed started its rate cuts last September.
Strategists at JPMorgan said: “Rate cuts have historically provided meaningful support for earnings with a lift in consumer spending, investment spending (capex and R&D), M&A and buybacks.”
