"The American Exception" halo fades! U.S. stocks and the dollar both lose favor

According to the Zhitong Finance APP, as the halo of "American exceptionalism" gradually fades, the U.S. stock market is lagging behind the global market. Just a few weeks ago, investors were cheering for Trump's return to the White House, betting that his tax cuts and tariff policies would stimulate economic growth and boost U.S. stocks and the dollar, which is known as the "Trump trade." However, this optimism has quickly deteriorated due to intermittent trade wars, large-scale reductions in government employees and spending under Musk's leadership in the government efficiency department, along with a series of data indicating a weakening economy.

Investors' attention has also shifted from U.S. stocks to other markets. Germany's announcement last week of a large-scale increase in spending plans is seen as a significant change in European policymaking, boosting the stock, currency, and government bond yields in the Eurozone. Additionally, the emergence of Chinese AI startup DeepSeek has raised questions about the U.S.'s dominant position in the technology sector.

Overall, the aura of American economic and market exceptionalism, which has dominated for more than a decade, seems to be on shaky ground. The once unstoppable S&P 500 index experienced its worst week relative to other global stock markets in this century just a week ago, less than a month away from setting a new historical high. The share of U.S. stocks in the global market capitalization has also declined from its peak of over 50% at the beginning of this year.

So far this year, the so-called "seven giants of U.S. stocks" have collectively fallen by 11%. This has dragged down the performance of U.S. stocks compared to Chinese and European stock markets. Disappointing earnings from some key U.S. companies have dampened investor enthusiasm for some of last year's "big winners." Daniel Skelly, head of market research and strategy at Morgan Stanley Wealth Management, stated that these factors are unlikely to permanently pull the U.S. from its throne as the world's largest and strongest stock market, but he noted that the current shift may have room to continue, "this rotation may persist for the next 6 months or even 12 months."

Meanwhile, the dollar has begun to weaken after experiencing its best quarter since 2016. Currently, the dollar index has fallen nearly 4% from its peak in January this year, reaching its lowest level since early November last year, with most of the decline occurring last week, and bearish voices on the dollar are growing louder.

The movement of the euro is a significant factor driving the dollar's weakness. On expectations that Germany and the EU's plans to increase defense and infrastructure spending will boost the Eurozone economy, the euro rose nearly 5% last week, marking its best weekly performance since 2009. Deutsche Bank and JP Morgan stated that the EU's commitment to implementing deep and lasting fiscal stimulus could further boost the euro. The derivatives market illustrates the significant volatility in market sentiment. Demand for hedging against the dollar's rise is shrinking, while options traders' bullish sentiment on the euro is nearing its highest level in over four years

In addition, as investors bet that a weakening U.S. economic outlook will require the Federal Reserve to cut interest rates for more support, U.S. Treasury yields have plummeted. Meanwhile, due to expectations that the German government will loosen its "debt brake," leading to a significant increase in government borrowing, German government bond yields have surged. This has caused the premium of U.S. long-term bond yields over Germany to suddenly shrink to its lowest level since 2023, potentially undermining the relative attractiveness of U.S. Treasuries.

Given the uncertainty surrounding the growth and inflation outlook in Europe, investors still have some doubts about whether German bond yields can sustain a significant rise. However, for now, this highlights the divergent trajectories of the two markets. For international investors, volatility must also be considered when assessing whether to invest in U.S. Treasuries. Monica Defend, head of the Amundi Investment Institute, stated that holding long-term U.S. Treasuries "is usually a safe haven," but "now it is a tactical trade because U.S. Treasuries are too volatile." In her view, gold and the yen provide better safe havens for investors.

Peter Tchir, head of macro strategy at Academy Securities, remarked, "This is the first time there is a compelling reason to invest outside the U.S. market. Previously, capital flowed into the U.S. without much consideration, but that situation may be reversing, or at least changing."

Most importantly, the U.S. economy has shifted from seemingly unshakeable to a worrying source. The U.S. non-farm payroll data for February released last Friday was mixed, but JPMorgan economists stated in a report to clients after the release of the February non-farm data that they believe the probability of a recession this year is 40% "due to the extreme policies of the U.S. government." U.S. Treasury Secretary Janet Yellen warned that as the U.S. government shifts the foundation of economic growth to the private sector, it will be a "detox period."

Although market sentiment can change rapidly—after all, the S&P 500 index took only about three weeks to return to historical highs after being hit hard by the DeepSeek shock at the end of January this year—as long as investors are still dealing with policy blows from the White House and uncertainties surrounding the U.S. tech dominance, they have increasing reasons to look beyond the U.S. market. Troy Gayeski, chief market strategist at FS Investments, stated, "American exceptionalism will continue to exist, but it will certainly be significantly challenged."