Cracks in the Logic of the U.S. Stock Market Bull Market: Is the Time to "Abandon the U.S. and Invest in Europe" Here?

According to the Zhitong Finance APP, as the Federal Reserve shifts to a hawkish stance and the "DeepSeek Shockwave" causes cracks in the "bull market logic" of the U.S. stock market, the risk of sell-offs in U.S. stocks is increasingly intensifying. Coupled with the recent rise in U.S. inflation expectations due to tariffs, economic outlook uncertainties, and the increasing concentration of the Nasdaq 100 Index and S&P 500 Index on the seven major U.S. tech giants (the "Magnificent Seven"), a strategy analysis team led by Alexander Altmann from Barclays recently stated that now is the best time to turn to other stock markets outside the U.S., especially to short U.S. stocks and buy European stocks.

Alexander Altmann, the global equity market tactical strategy head at Barclays, joined the bank last year after leaving the portfolio management team at global asset management giant Millennium Management. He suggests temporarily shorting the so-called "American exceptionalism in investment"—at least while the valuations of the U.S. stock market are at historical highs.

In a recent interview, Altmann stated, "This is not me expressing a structural bearish stance on American exceptionalism." He emphasized that this is a tactical investment strategy. "I just believe that in the short term, this unique narrative space has basically run out."

Notably, over the past two months, this Wall Street star strategist has been very optimistic about the European stock market, and his predictions regarding the upward trend of European stocks have been very accurate. He refers to this bullish strategy on European stocks as the "Winter Leasing" trade. The benchmark index for European stocks is at an all-time high, and despite the ongoing trade war shadows between the U.S. and other countries, European corporate earnings reports have performed well, driving a significant rise in European stocks since the beginning of the year, greatly outperforming the U.S. stock market.

The benchmark index for European stocks—the Stoxx 600 Index—has achieved its best-ever start in dollar terms, partly due to its superior performance compared to the S&P 500 Index, as the rise of the seven major U.S. tech giants has stagnated or even declined due to the Federal Reserve's hawkish shift and the "DeepSeek Shockwave," along with lackluster fourth-quarter earnings reports and outlooks. In contrast, the market capitalization concentration of European stocks is much lower than that of U.S. stocks, and their exposure to artificial intelligence risks is also significantly smaller than that of U.S. stocks.

The European stock market is experiencing its best start since 2000—market performance adjusted for currency as of February 6.

The so-called "Magnificent Seven" tech giants, which hold a high weight in the S&P 500 Index and Nasdaq 100 Index, include: Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Facebook's parent company Meta Platforms, which are the core drivers behind the S&P 500 Index's record highs Looking at the entire U.S. stock market, the seven major tech giants have been the core driving force behind the rally since 2023. With their incredibly strong revenues driven by AI investments, solid fundamentals, sustained strong free cash flow reserves over the years, and continuously expanding stock buyback programs, they have attracted a flood of global capital.

For many years, due to the strong stock performance of these tech giants, the U.S. stock market has significantly outperformed the European stock market. Over the past five years, the total return of the U.S. benchmark index—the S&P 500—has been about twice that of the European benchmark index, with an increase of nearly 100%.

The "bull market narrative" in the U.S. stock market is being altered by the hawkish Federal Reserve and the DeepSeek shockwave.

The view from the strategy team at Barclays, led by Altman, regarding the significant cracks in the logic of the U.S. stock market bull market aligns closely with that of the wealth management division of Morgan Stanley, one of Wall Street's top investment institutions. They believe that the Federal Reserve's pause on interest rate cuts and the "low-cost AI shockwave" brought by DeepSeek are changing the "bull market narrative logic" of the U.S. stock market. Morgan Stanley emphasized in a research report that, overall, investors should focus on the "rotation and switching trends of leadership forces" in the U.S. stock market, as the bull market narrative is being shaken by these two major forces.

Lisa Shalett, Chief Investment Officer of Morgan Stanley's wealth management division, wrote in the research report: "Although the financial markets have largely anticipated the Federal Reserve's pause on interest rate cuts in January, many investors still hope the Fed will express a path toward monetary easing. However, the Fed did not make the 'dovish' statements that the market expected. Investors now need to acknowledge that policy-driven valuation expansion is nearing its limits, and market drivers will shift to earnings realization, especially the monetization path of AI."

"The DeepSeek shock event... reinforces our view that the market's bull market narrative is changing, and we are entering what is referred to as the 'Great Normalization' phase. We believe this phase will be dominated by the normalization of interest rates and market valuations; earnings growth will once again become the main driver of the stock market, while the market capitalization concentration of the S&P 500 is expected to decline significantly, indicating a weakening trend for the seven major tech giants," Shalett stated in the report.

With an extremely low investment cost of less than $6 million and the H800 chip's performance far below that of the H100 and Blackwell, the DeepSeek team has created an open-source AI model with performance comparable to OpenAI's o1. In contrast, the training costs for Anthropic and OpenAI reach as high as $1 billion, while DeepSeek's pricing for inference input and output tokens is considered a "deeply discounted" promotion compared to OpenAI's pricing.

As the "DeepSeek low computing cost storm" sweeps across the globe, investors have begun to strongly question whether the U.S. tech giants' seemingly fanatical AI spending plans are reasonable. After all, expenditures often reaching hundreds of billions of dollars, compared to DeepSeek's mere million-dollar costs, have left these U.S. tech stock investors both shocked and furious, as they believe shareholder profits are being continuously eroded by unreasonable spending Due to investors' concerns that the "low-cost AI large model computing paradigm" led by DeepSeek will prompt tech giants to significantly cut AI GPU orders in the short to medium term, NVIDIA's stock price plummeted nearly 17% on January 27, resulting in a single-day market value loss of $589 billion, the largest market value loss in U.S. stock market history.

Barclays advises investors to abandon U.S. stocks and turn to European investments.

However, not only have top European investment banks like Barclays changed their sentiment towards European stocks, but global investors also seem to have turned positive on the European stock market recently, which has been favored by financial markets due to its long-standing relative undervaluation.

The political environment in the UK and France is relatively stable, and policymakers at the European Central Bank and the Bank of England are more dovish in their monetary policy stance compared to the Federal Reserve. At the same time, concerns about a comprehensive trade war have eased, with tariffs being viewed more as negotiation tools between the Trump administration and major trading partners rather than anything else.

Meanwhile, the benchmark stock index measuring the "seven major U.S. tech giants" remained flat at the beginning of 2025, and global funds' skepticism about the U.S.'s dominant position in AI technology and infrastructure development is gradually rising. A market survey by Bank of America last month showed that investors' allocation to European stocks shifted from a net reduction of 22% to a net increase of 1%, marking the second-largest increase in global funds' allocation to the European market in the past 25 years.

The European government's attitude towards AI development has shifted from cautious strict regulation to a supportive stance, which is also the core logic behind the positive outlook on European stocks. Although European stocks tend to be diversified across industries, there are also leading tech players such as ASML, SAP, Infineon, and Be Semiconductor. French President Macron recently emphasized in a speech that avoiding the "regulate first, innovate later" approach is crucial. This means that Europe may place greater emphasis on balancing innovation and regulation in future tech innovation policies, rather than relying solely on strict prior regulation.

It is understood that French President Macron announced a significant investment of €109 billion for the construction of France's AI infrastructure on the eve of a two-day "AI Summit," which also indicates that European countries will increase their investment efforts in AI infrastructure and the development of AI technology in the future.

President Macron views the nation's ambitions in the field of AI as a priority and plans to hold a globally significant AI summit on Monday and Tuesday. For the European market, where tech stock valuations are generally lower compared to U.S. stocks, strong policies from European countries are expected to attract more funds to flow into the European stock market The views of the strategist team from Bank of America last week were also in line with those of Barclays' Altman team. They both pointed out that under the impact of DeepSeek, the stock market influence of American tech giants is weakening, and emphasized that since the beginning of this year, the stock returns of several other markets have surpassed the S&P 500 index.

The team led by Altman stated that the core message is that investors should seek investment opportunities outside of the U.S. stock market and U.S. artificial intelligence trades, and suggested shorting the U.S. stock market while buying European stocks. His team also noted that the current long positions of hedge funds are very high, putting the U.S. stock market in a vulnerable position. "Methods that have been effective over the past two years may not perform as well this year."

Altman also issued a warning regarding his outlook on the European stock market. He believes that as the German elections approach later this month, the European stock market may become more volatile, but this could also present significant buying opportunities on dips.

In the U.S. market, Altman sees certain areas with upside potential as data shows that U.S. manufacturing expanded for the first time last month. He mentioned some key stocks in sectors such as materials, industrials, and energy