Global stock market divergence continues: US stocks fall into "valuation kill," while Europe and China are expected to welcome the "Davis Double Hit."

According to the latest statistics from Zhitong Finance APP, the divergence in stock market trends between the United States and the Eurasian continent since the beginning of this year is likely to continue—specifically, the Eurasian stock markets may continue to significantly outperform the U.S. stock market. Moreover, a brighter outlook for European and Asian stock markets is gradually emerging in the improving corporate earnings expectations, along with the "animal spirits" shifting from the U.S. to the Eurasian markets. Meanwhile, the profits and valuations of U.S. artificial intelligence-related concept stocks, including the "Seven Giants" such as Nvidia, Microsoft, and Google, are facing market skepticism. Most Wall Street analysts have recently chosen to raise their earnings expectations for European companies while almost simultaneously lowering the overall profit expectations for U.S. companies.

Bloomberg Intelligence's compiled statistics show that Wall Street analysts have raised the earnings expectations for European listed companies in 2025 by 0.6% since the beginning of the year. At the same time, due to recent economic data indicating high inflation and a downturn in the service sector supporting the U.S. economy, the market is increasingly worried about the U.S. economy falling into "stagflation," leading to a roughly 1% downward adjustment in the overall earnings forecast for U.S. listed companies over the past month. The semiconductor sector, represented by Nvidia (NVDA.US), which is set to release its earnings report this week, has seen the most significant downward adjustment in performance expectations.

Although the overall earnings expectations for the U.S. stock market are being adjusted down from a higher baseline, this trend still indicates a sustained bull market for the European benchmark index—the Stoxx 600 index—often referred to as the outlook for a "long-term bull market." This index is on track for its strongest first-quarter performance relative to the S&P 500 index in a decade.

In Asia, analysts are turning optimistic about corporate earnings expectations, especially for the largest stock market in Asia—the Chinese stock market (including Hong Kong and A-share markets)—where corporate earnings expectations are continuously improving. The so-called "animal spirits" in the stock market are fully flowing out of the U.S. stock market and accelerating their penetration into the European and Asian stock markets, driving the Eurasian stock markets to experience a so-called "valuation pull" trend and a sustained growth trend driven by improved performance expectations.

This is also why some analysts expect that the European and Chinese stock markets are about to experience a "Davis Double Play"—a sustained upward trend catalyzed by simultaneous increases in corporate earnings and valuations.

"Animal Spirits" is a term in economics and finance, originally introduced by economist John Maynard Keynes in his classic 1936 work "The General Theory of Employment, Interest, and Money." Keynes described it as "the emotional and confidence factors of humans in economic activities, specifically the psychological forces driving investment, consumption, and economic decision-making," emphasizing that these forces are often based on irrational factors In modern economics, "animal spirits" are used to explain the "irrational factors" behind market fluctuations, economic cycles, and other phenomena, especially in cases where traditional economic models cannot fully explain them. For example, the phenomenon of short-term surges and drops in the stock market. Therefore, animal spirits are the core catalytic factor of the so-called "valuation pull" in the stock market.

The "animal spirits" that have driven the surge in the U.S. stock market over the past two years are accelerating their "export" to the global market, while the "animal spirits" in the U.S. domestic market are showing signs of "animal spirit decay" due to the latest released weak economic data and high inflation expectations—some market professionals indicate that this trend may have only just begun.

DeepSeek's groundbreaking "ultra-low-cost AI large model" has become an unprecedented "bull market catalyst" for global investors to reassess Chinese assets, especially the Chinese stock market (including Hong Kong stocks and A-shares), at a time when these investors were already concerned about the increasingly high valuations of U.S. tech stocks. The emergence of DeepSeek has ignited an unprecedented investment frenzy around China's artificial intelligence sector, attracting global funds—including leveraged hedge funds and traditional asset management giants—while the booming market for Chinese tech stocks is expected to lead both Hong Kong stocks and A-shares into a long-term bull market. Overall, these factors are shaking the so-called "American exceptionalism," which posits that the U.S. market will continue to outperform other markets.

U.S. Stocks Face "Valuation Kill," Euro-Asian Markets May Welcome "Davis Double Hit"

A series of negative economic news has led to a sharp market decline, and the U.S. stock market had an extremely difficult week last week. Coupled with the emergence of DeepSeek, the "seven giants" at historically high valuations have inevitably led the overall high-valued U.S. stocks into a sustained correction trend, resulting in a so-called "valuation kill" market, and this trend seems difficult to stop in the short term.

Regarding the latest economic data, the pace of U.S. economic expansion slowed to near stagnation levels in February. The U.S. Composite PMI fell from 52.7 in January to 50.4, hitting a new low in 17 months. More pessimistic data shows that the massive service sector activity, crucial for the U.S. economy, has contracted for the first time in over two years, with the service sector PMI initial value at 49.7, entering the contraction zone, significantly lower than January's 52.9, marking a new low since January 2023. This is also the core logic behind the recent significant rise in expectations of "stagflation" in the U.S. economy.

In terms of inflation, both the January CPI and PPI exceeded expectations, and U.S. consumers' long-term inflation expectations even rose to the highest level in nearly 30 years. The latest inflation expectations released by the University of Michigan for February show that U.S. consumers' 5-year to 10-year inflation expectations have a final value of 3.5%, marking the largest month-on-month increase since May 2021 and the highest level since 1995, with respondents generally concerned that Trump's tariff increases will lead to rising prices.

Since the "DeepSeek Shockwave" on January 27 caused a $1 trillion evaporation in U.S. stock market value, investors have begun to strongly question whether the tech giants' seemingly frenzied AI spending plans are reasonable, given that expenditures often reach hundreds of billions of dollars, which, compared to DeepSeek's mere million-dollar-level costs, has left these U.S. tech stock investors both shocked and furious They believe that shareholder profits are being continuously eroded by unreasonable expenditures, and the so-called "AI monetization" prospects are becoming increasingly unclear.

In contrast, European and Asian stock markets are experiencing a different kind of prosperity. The aforementioned statistics show a significant improvement in earnings expectations for European stock markets. In Asia, after the "DeepSeek shockwave" severely impacted U.S. tech giants, Wall Street's major bank Goldman Sachs has shown bullish enthusiasm for the Chinese stock market. The China equity research team at Goldman Sachs expects that the widespread adoption of AI over the next decade is likely to drive overall earnings of Chinese stocks up by 2.5% annually. Goldman Sachs has also raised the target points for the MSCI China Index and the CSI 300 Index to 85 points and 4,700 points, respectively, indicating that both indices have about 15% and 20% upside potential over the next 12 months. Moreover, Goldman Sachs anticipates that improved growth prospects and the resulting potential boost in confidence could bring up to $200 billion in capital inflows to the Chinese stock market.

Combined with the so-called "animal spirits" gradually fading in the U.S. stock market, which are instead accelerating their penetration into the Eurasian continent, the "Davis Double-Trigger" style rally in European and Asian stock markets seems to be ongoing. After soaring over 50% cumulatively in 2023 and 2024, the S&P 500 Index has remained basically flat since Donald Trump took office as U.S. President. Popular trades are now shifting overseas, with investors flocking to European and Asian stock markets, ignoring threats from tariffs, trade wars, and military conflicts.

Since Trump's inauguration, the STOXX Europe 600 Index has risen by 5.8%, while the Nasdaq Golden Dragon Index has surged by 18%. In contrast, the S&P 500 Index has only increased by 0.3% during the same period, with a single-day drop of 1.7% last Friday further dragging down the index's performance. For traders adopting the same strategy, the logic is simple. Stocks outside the U.S. missed most of the gains over the past two years, and now, as the global economic outlook stabilizes, these stocks appear relatively cheap. Meanwhile, the uncertainty surrounding tariffs has begun to exacerbate market sentiment regarding "stagflation" in the U.S. economy, and the strength of the dollar and U.S. stocks has waned.

The popularity of Chinese AI startup DeepSeek has also led investors to reconsider the excessively high prices of U.S. stocks, making Chinese tech stocks more attractive in the short term. Overall, these factors are shaking the so-called "American exceptionalism," which posits that the U.S. market will continue to outperform other markets.

"This shift could be long-term rather than cyclical," said Mark Hackett, chief market strategist at Nationwide Investment Management Group, which manages about $75 billion in assets. "The only time in recorded history that the performance and valuation gap between the U.S. market and international markets was this wide was during the tech bubble. And when this shift occurs, it comes on strong and lasts a long time."

Valuation Comparison Shows Clear Advantages for European and Chinese Stock Markets

Capital flows and valuations both indicate that there is significant potential for growth in non-U.S. stock markets, especially in the future upside potential of European and Asian stock markets An analysis by JP Morgan found that, excluding Chinese stocks, the relative performance of U.S. stocks has been poor this year, representing only a 10% to 20% reversal of the pro-U.S. investment theme that dominated the market from April 2023 to the end of last year. Citigroup stated that investors' positions may have "significantly" shifted towards Europe, with investors now more bullish on Europe than on the U.S.

Over the past two years, global stock market performance has lagged far behind that of the U.S. stock market, with the Stoxx 600 index rising 20%, the Golden Dragon Index only rising 1%, while the S&P 500 index soared 53%. Even after this year's rise, the average price-to-earnings ratio of the Stoxx 600 index remains at 14x, far below the S&P 500 index's 22x. The price-to-earnings ratio of the Chinese Golden Dragon Index, after a significant rise in February, is 17x, still lower than that of the U.S. stock market.

More attractive valuation levels, optimistic investor sentiment brought about by fiscal reforms after the German elections, and eager expectations for a ceasefire between Russia and Ukraine have collectively driven funds towards European assets.

Further valuation comparisons show that even after a 29% surge since 2025, entering a "technical bull market," the expected price-to-earnings ratio of the Hang Seng Tech Index hovers around 17x, with a price-to-sales ratio of only 1.1x, below its own average level, and far below the expected price-to-earnings ratio of 28.2x and price-to-sales ratio of 4.5x for the Nasdaq 100 index.

Although the average price-to-earnings ratio of the U.S. stock market has been higher than that of most Asian markets for over a decade, this "price-to-earnings premium" has now reached a historical high. The chart below shows that the one-year expected price-to-earnings ratio of the S&P 500 index has reached the highest valuation premium compared to emerging market stock indices, as well as the South Korean and Hong Kong stock markets, since LSEG DATASTREAM has been tracking.

In the U.S. stock market, **while the stock price of Facebook's parent company Meta has performed very strongly, the sluggish performance of other tech giants has dragged down the benchmark stock index measuring the seven giants, as well as the S&P 500 index and the Nasdaq 100 index, where the seven giants account for a high weight of 30%-40%, deeply trapped in a "valuation kill" market, significantly underperforming Chinese tech giants like Alibaba and the European Stoxx 600 index. The underperformance of the seven tech giants this year is mainly due to market concerns over their massive spending in the field of artificial intelligence without seeing substantial profit returns, as well as worries that they will be at a disadvantage in competition with China in AI applications and large models **

This week's focus on NVIDIA's quarterly earnings report will center on the growth prospects of AI application demand in the U.S., particularly the demand growth for AI inference, as the enormous spending urgently requires strong AI inference computing power to offset it. NVIDIA has not yet fully recovered from the sharp decline in late January due to market concerns about the demand for its AI GPU products, especially the Blackwell series AI GPUs, which faced a "low-cost impact" from the Chinese chatbot startup DeepSeek. On January 27, NVIDIA's market value evaporated by as much as $589 billion, marking the largest market value loss in U.S. stock market history, with a single-day drop of up to 17%.

The so-called "Magnificent Seven," which dominate the S&P 500 and Nasdaq 100 indices, includes: Apple, Microsoft, Google, Tesla, NVIDIA, Amazon, and Facebook's parent company Meta Platforms. They are the core driving force behind the S&P 500 index's continuous record highs.

Looking at the entire U.S. stock market, the seven tech giants have been the core driving force leading the entire U.S. stock market since 2023. With their incredibly strong revenue from AI investments, solid fundamentals, years of robust free cash flow reserves, and expanding stock buyback programs, they have attracted a flood of global capital. However, this year, the logic of the seven giants leading the U.S. stock market has fundamentally changed. Except for Meta, the stock price performance of other tech giants has significantly underperformed the S&P 500 index, becoming the core negative catalyst dragging down the entire U.S. stock market. Investors have begun to strongly question the AI competitiveness of the highly valued U.S. tech giants compared to China and doubt the rationality of the U.S. giants' seemingly fervent AI cash-burning plans.

With the comprehensive rise of the Chinese AI startup DeepSeek, and its leadership in a new "AI large model computing paradigm" centered on "low cost" and "high efficiency," DeepSeek has begun to deeply integrate with various industries such as healthcare, finance, and education, as well as AI application terminals like consumer electronics, bringing innovative AI products/services that are expected to drive sales and operating profits in China's semiconductor, SaaS software, cloud computing, and all industries into a new growth paradigm, boosting global investors' bullish sentiment towards Chinese stocks. In particular, the bullish sentiment towards giants like Alibaba and Tencent, which have strong cloud AI computing power systems and will significantly benefit from the demand for inference computing power, has further intensified this week