MAGA reversal: Trump causes the US stock market to slump, but instead makes the Chinese stock market great again

As U.S. President Trump’s widespread trade war raises concerns about a recession in the U.S. economy, global investors seem to be turning to a new safe haven: the Chinese stock market. The MAGA strategy appears to have had an unexpected effect.

Since 2021, the performance of the U.S. stock market has far outpaced that of most global stock markets. However, currently, Trump’s erratic comments on tariffs and measures to cut federal government spending have undermined the attractiveness of the U.S. stock market. Andy Wong, an executive at Baillie Gifford in Hong Kong, stated that investors have shifted from believing in “TINA” (There Is No Alternative to U.S. assets) to believing in “TIARA” (There Are Real Alternatives).

East Rises, West Falls

Since Trump took office in January this year, the Hong Kong Hang Seng Index has risen by 17%, with many large Chinese companies listed on this index. In contrast, the S&P 500 Index has fallen by about 9%, with the market value evaporating by $4 trillion from last month’s historical high.

S&P 500 Enters Correction Zone, Wall Street Pessimistic About U.S. Stocks

On Thursday, concerns over tariffs once again disrupted Wall Street, pushing the S&P 500 Index into correction territory, falling to its lowest point in six months. The S&P 500 Index dropped 1.4%, marking a decline of over 10% for three consecutive weeks, reaching the technical threshold for a pullback. It has fallen more than 6% this year. The tech-heavy Nasdaq 100 Index is also in correction, down 1.9%. The Dow Jones Industrial Average fell 1.3%, down 9.3% from its historical record set last December.

Data shows that the S&P 500 Index has fallen for 16 trading days from its peak on February 19, marking the seventh-fastest pullback on record since 1929. Of the seven fastest sell-offs of this magnitude, three occurred during Trump’s presidency, in 2018, 2020, and now.

Despite recent data indicating that the U.S. economy remains resilient, investor sentiment is deteriorating. This pessimism suggests the extent to which Trump’s policies, particularly trade policies, have disrupted Wall Street’s mood. Meanwhile, layoffs and eviction threats from federal agencies have weakened confidence in the strength of the labor market.

Wall Street strategists, including those from HSBC, Goldman Sachs, and Citigroup, have recently become more cautious about the U.S. stock market.

This week, Goldman Sachs strategists lowered their year-end target for the S&P 500 Index from 6,500 points to 6,200 points, citing increased policy uncertainty, particularly regarding tariffs, and concerns about economic growth prospects. Analysts from Citigroup and HSBC also downgraded their outlook for the U.S. stock market this week, citing economic concerns and pointing out better opportunities elsewhere. Market forecasters from banks such as JP Morgan and Royal Bank of Canada Capital Markets have also lowered their bullish expectations for U.S. stocks in 2025 Chinese Stock Market Rises, Valuations Are Attractive

The rebound in the Chinese stock market has largely been led by technology stocks, which have risen 29% so far in 2025, reaching their highest level in over three years last week. Like many new bulls in the Chinese stock market, Wong sees opportunities in technology, defense, and consumer-facing stocks.

A key reason for optimism in the Chinese stock market is that Chinese stock prices are cheap, currently 30% lower than their peak in 2021. According to LSEG data, the Hang Seng Index has a 12-month expected price-to-earnings ratio of 7 times (a common measure of stock value), while the S&P 500 Index has an expected price-to-earnings ratio of 20 times.

Chinese technology stocks surged significantly after the launch of the R1 inference model by Chinese AI startup DeepSeek, as investors saw substantial upside potential. Chinese fiscal stimulus measures are also expected to boost consumption, which is another favorable factor.

Interviews with a dozen fund managers and strategists by U.S. media show that although the renewed interest in the Chinese stock market comes at the expense of the U.S. stock market, investors are also withdrawing from the struggling South Korean and Indian stock markets.

Serene Chen, head of credit, currency, and emerging markets sales at JP Morgan, noted that a record number of dollars have been exchanged for Hong Kong dollars in recent weeks, indicating a significant influx of funds into the Hong Kong stock market.

Leo Gao of Greenwoods Asset Management said that shortly after the launch of DeepSeek, he sold all U.S. companies in his portfolio at the beginning of February. The senior portfolio manager of one of Asia's largest hedge funds told investors in March that he is now particularly optimistic about Chinese technology companies and others that cater to changing consumer habits.

Turning to the Chinese Stock Market

Trump's refusal to rule out the possibility of the world's largest economy falling into recession has heightened market concerns. Investors have also reacted negatively to the volatility of White House decisions, even as the White House delayed tariffs on Canada and Mexico at the last minute.

Continuously slowing economic data has further raised doubts about whether U.S. economic growth can outpace that of other developed countries for a longer period. Moreover, U.S. stock market valuations are absurdly high, making any signs of trouble likely to cause a shock. So far, Trump has downplayed market turbulence and repeatedly stated that "tariffs will make our country wealthy."

Kamal Bhatia, CEO of Principal Asset Management in New York, stated that long-term investors prefer predictability. He said, "Even very sophisticated large investors do not want their investment philosophy to change in three years."

Meanwhile, China has been rolling out measures to stimulate and support the economy and the market. Morgan Stanley's data shows that after three consecutive months of outflows, foreign funds invested $3.8 billion in the Chinese stock market in February

Against this backdrop, Citigroup strategists downgraded their rating on U.S. stocks from overweight to neutral while upgrading their rating on Chinese stocks to overweight, stating that the "American exceptionalism" narrative has at least paused. Dirk Willer, Global Head of Macro Research and Asset Allocation at Citigroup, wrote in a report that since October 2023, Citigroup has been overweight on U.S. stocks, but the cracks in the ability of U.S. stocks to outperform the market have become more apparent. Meanwhile, he noted that considering DeepSeek's breakthroughs in artificial intelligence technology, government support for the tech sector, and still low valuations, the Chinese stock market looks very attractive even after the recent rebound.

Willer wrote, "In the coming months, news from the U.S. economy may not be as favorable as that from other parts of the world, so at least tactically, the American exceptionalism narrative is unlikely to make a comeback." He added that the neutral view on U.S. stocks is within a three to six-month timeframe, expecting more negative data to be released from the U.S.

Interestingly, when Trump targeted the EU and China with tariff policies, European and Chinese stock markets experienced a rebound. Ross Mayfield, an investment strategist at Baird, stated, "The pressure the Trump administration has exerted on foreign governments... has actually, in many cases, led to better performance from those countries compared to others."

Wong from Pictet noted, "As investors adapt to the changing narrative, funds will flow out of previously popular winners."

Following Trump's earlier indication of considering abandoning NATO leadership, Europe may see a surge in fiscal spending, which has also boosted the stock prices of defense companies in the region. European stock markets have long faced headwinds, including rising corporate tax rates, slowing economic growth, and a lack of large tech companies.

Lilian Haag, Senior Portfolio Manager at DWS, stated, "The situation over the past 10 days clearly indicates that adopting a regionally diversified allocation strategy is worthwhile."