U.S. stocks and the U.S. dollar both face a downturn: Is the "American exceptionalism" aura fading?

According to the Zhitong Finance APP, at the beginning of this year, investors generally bet that U.S. President Trump's policies would help the U.S. stock market and the dollar stand out in the global market. However, this expectation seems to be facing increasing challenges.

Trump's reforms and large-scale initiatives in trade and other policies have not only failed to instill confidence in investors but have also injected uncertainty. Moreover, consumers and businesses are worried about the economic outlook, threatening the narrative of American exceptionalism.

Garrett Melson, a portfolio strategist at Natixis Investment Managers, stated, "Policy uncertainty is leading to a dynamic where investors, business leaders, and consumers are starting to slightly tighten their spending."

He added, "The backdrop to this is that, aside from all the noise from policies and the Trump administration, the U.S. economy is already on a cooling track."

Additionally, the large U.S. technology and growth companies that have driven most of the market gains in recent years are struggling due to concerns over valuations and China's low-cost AI model, DeepSeek. An ETF tracking the so-called "seven giants" group has fallen more than 10% since its peak in mid-December last year.

Although a key member of the "seven giants" group, NVIDIA (NVDA.US), provided better-than-expected first-quarter revenue guidance in its earnings report released on Wednesday, the slightly lower-than-expected profit margin outlook may set the tone for U.S. stocks on Thursday.

U.S. Stocks and Dollar Both Cool Down

Entering 2025, the U.S. stock market and dollar were widely expected to outperform their foreign counterparts. However, since the beginning of this year, the U.S. benchmark S&P 500 index has only risen a little over 1%, while the MSCI index, which covers stocks from over 40 countries, has risen about 7%. Meanwhile, the dollar has fallen about 3% against a basket of major currencies since its peak in January.

This performance disparity is partly due to developments outside the U.S., including surprisingly strong economic data from Europe and the emergence of China's AI models, which have shaken the technology sector that holds significant weight in the U.S. stock market.

At the same time, recent weak indicators from consumers and businesses, along with the Trump administration's announcement of a series of trade policy and government agency layoff announcements, have intensified concerns about the U.S. economic growth outlook.

In the past week, there have been worrying signs in the U.S. economy, including data released on Tuesday showing that consumer confidence fell at the fastest pace in three and a half years in February, and another report indicating that consumer sentiment dropped to a 15-month low.

A survey released last Friday also showed that business activity fell to a 17-month low, with February's activity nearly stagnating.

These economic reports may give investors more reasons to allocate to international assets, as these assets have become increasingly cheaper compared to the U.S. For example, according to LSEG Datastream, the premium of the S&P 500 index relative to the MSCI index of stocks outside the U.S. reached its highest level in over 20 years by the end of 2024 At the beginning of this year, Paul Nolte, a senior wealth advisor and market strategist at Murphy & Sylvest Wealth Management, stated that the global stock investment portfolio has been increasingly allocated to stocks outside the United States: "People have been expecting the U.S. (economy) to continue performing well. Therefore, if there are issues in this regard, some valuations in the U.S. may need to decline to levels closer to those in other parts of the world."

Charlie McElligott, Managing Director of Cross Asset Strategy at Nomura Securities, stated in a report on Monday that the recent weakness in U.S. economic data has led investors to increasingly raise the probability of a "growth panic" scenario.

He noted that investors seem to be "understanding" the impact of the initial policies of the Trump administration and are beginning to consider a more severe growth drag than what was implied by the early narrative after the election.

Other indicators may also reflect a more bleak outlook for businesses. A survey by the National Federation of Independent Business in January found that the proportion of small business members planning to make capital expenditures in the next six months has fallen to its lowest level since before the November election last year.

Data from Dealogic shows that despite expectations of a more favorable regulatory environment for mergers and acquisitions, the value and total number of U.S. deals announced in the first two months of 2025 have decreased by about one-third compared to the same period last year.

BBH strategists stated in a report on Tuesday that "another month or two of poor U.S. economic data will deal a blow to the narrative of American exceptionalism" and pose downside risks to the dollar.

European Stocks Surge

European stock markets have generally surged at the beginning of this year, with the pan-European STOXX 600 index rising by 10% so far in 2025.

Michael Rosen, Chief Investment Officer at Angeles Investments, stated that recent corporate profit growth in Europe has exceeded expectations more than in the U.S.

Rosen mentioned that for most of the past 15 years, his company has been "actively increasing its holdings" in the U.S. stock market, but will shift more towards European stocks in the short term.

Rosen said, "There is more evidence that the very strong economic performance we have seen in the U.S. is beginning to weaken."

Keith Lerner, Co-Chief Investment Officer at Truist Advisory Services, noted that in fact, the post-election American exceptionalism trade has become "too crowded," paving the way for at least some reversals at the beginning of the year.

The Leadership of the "Seven Giants" is Undeniable

However, for many investors, despite the shaky start of U.S. assets, they may still not give up on trading Although the U.S. economy shows signs of weakness, many investors say the risk of a short-term recession remains low, and the economic benefits of Trump’s policies may materialize later this year.

Investors indicate that if the U.S. economy does indeed falter, this weakness could eventually spread elsewhere.

Nolte stated, "If the U.S. catches a cold, the rest of the world will catch the flu." The "Seven Giants" are seen by many investors as more resilient to economic downturns than other sectors, which may support the U.S. market amid a global slowdown.

Phil Blancato, Chief Market Strategist at Osaic, said, "The stock prices of the 'Seven Giants' are not cheap... but their leadership is unquestionable."