(Bloomberg) - A year ago, investors were sure that a presidential win for Donald Trump would doom international stocks to underperform the US market due to his promises to ratchet up tariffs and cut taxes. A year later, they can’t get enough of global equities.
The first year of Trump’s second presidency has brought an unusual reversal to a long-running trend: Benchmarks in China, Europe and Canada have all outperformed the S&P 500 in dollar terms since his election victory a year ago.
MSCI Inc.’s gauge of global equities excluding the US is beating Wall Street this year by the widest margin since 2009, and the selloff triggered yesterday by valuation concerns doesn’t change the picture.
Investors have poured money into global equities since Trump’s election. Initially, it was to hedge against US stock volatility triggered by the president’s chaotic rollout of tariffs. Then they went looking for cheaper alternatives to the S&P 500, an index that’s been driven by richly valued tech stocks. A weakening US currency has flattered international returns in dollar terms.
“There was a clear consensus among strategists that the impact would be brutal on global stocks, but actually, it wasn’t,” said Florian Allain, a fund manager at Mandarine Gestion in Paris. “The big surprise this year has been how the falling dollar and the tariffs headwinds are currently and gradually being digested.”
The performance is vindication for a few strategists, notably Peter Oppenheimer at Goldman Sachs Group Inc. and Bank of America Corp.’s Michael Hartnett, who presciently said in 2024 that investors should look beyond the US market.
Hartnett, for one, now expects the pace of outperformance to slow amid strong US earnings growth and lower bond yields, but remains positive on international equities. Investors are likely to further shift money into global stocks in the second half of the decade after the first half was all about US exceptionalism, he said.
Asia’s Outperformance
Asian equities have outperformed thanks to the region’s position at the heart of the AI supply chain — home to major chipmakers, foundries, and semiconductor-equipment bellwethers such as Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co., and Tokyo Electron Ltd.
South Korea’s Kospi Index has surged 55% in the past year, the best performance among major countries, reflecting its status as Asia’s most attractively valued AI proxy.
With valuations now stretched, the next phase of the rally will depend on companies showing that all their spending on artificial intelligence is paying off with earnings, capital spending trends extending into 2026, and whether Trump sustains a cooperative approach toward China on trade.
In the meantime, stocks are vulnerable to pullbacks, according to Xin-Yao Ng, a fund manager at Aberdeen Investments.
“I will not be surprised if we see a year-end correction as the market has been quite momentum-driven, and there will be funds that will want to lock up returns ahead of year end, especially after such a strong run,” said Ng. “I still think there are legs but I’m not sure how long it can last; risk is definitely rising.”
Still global markets remain cheaper than US shares. If AI optimism endures, Korea, Taiwan, and parts of China could remain at the forefront of global equity leadership.
Meanwhile, in Europe, things are looking much better than anticipated. Economic indicators are on the rise, inflation is contained and the European Central Bank has already lowered interest rates to 2%, a much lower level than in the US.
Separately, the European Union, and Germany in particular, are ramping up defense and infrastructure spending for the next decade, with the effects set to kick in this by the end of this year. That has boosted financial, defense and energy-transition stocks.
Outside the accommodative fiscal and monetary policies, European businesses have blunted the impact of tariffs by measures including price hikes and cost cutting, as well as direct trade negotiations with the Trump administration at the industry or company levels. The US has slapped a 15% tariff on goods imported from the European Union, 10% from the UK and 39% from Switzerland, in addition to sectoral levies on industries like steel.
In many cases, the tariffs have turned out to be less damaging than the initial announcements would indicate.
“Europe isn’t in a bad position for 2026,” said Mandarine Gestion’s Allain. “Looking forward, I expect a tailwind from European growth accelerating with the German stimulus plan and therefore the growth gap with the US to somewhat close a bit.”
Despite being hit by the highest tariffs in Europe, Switzerland’s exports to the US rebounded in September, suggesting demand is withstanding the impact. Separately, pharmaceutical companies Novartis AG and Roche Holding AG have been in talks with the US on cutting drug prices and have pledged billions in investments for a reprieve on looming sectoral tariffs. UK peer AstraZeneca Plc struck a deal in October.
Still, the Swiss market has underperformed this year, up just 6.2% compared with 15% for the euro-area peer Euro Stoxx 50, as investors mostly shunned exporters and defensive stocks.
Earnings Grow Globally
In Canada, a country that Trump said he would use “economic force” to annex and make the 51st state, investors felt a sense of dread after the election, said Philip Petursson at IGM Wealth Management. Petursson said his firm was defensive going into 2025 and underweight equities given the high level of economic uncertainty and expectations for punitive tariffs.
Instead, the market has seen strong gains since Trump backed off his harshest tariff threats in early April. The S&P/TSX Composite Index has risen 23% since the election and is on pace to outperform its US counterpart in a rising market for the first time since 2010.
Petursson went overweight on stocks in Canada as well as other international and emerging markets in April.
“The earnings growth is going to be just as strong here as they are in the US but at a better price,” he said. “I can pick up the same earnings profile at two-thirds the cost of the S&P 500 on a P/E basis.”
Over in emerging markets, equities are close to topping their 2021 high after a rally of about 30% this year, largely led by Asian shares. One standout market can be found in Brazil, another country targeted by a high US tariff rate.
Brazilian stocks have jumped 44% in dollar terms, with the nation’s benchmark Ibovespa index repeatedly hitting record highs. Expectations of lower interest rates, both globally and at home, have fueled the Ibovespa’s rally, with foreign investors pouring more than $4 billion into the local equity market.
“What’s really reassuring is the speed at which companies have adapted to tariffs and have been able to announce shift of production to other countries or the US,” said Ariane Hayate, a fund manager at Edmond de Rothschild Asset Management.
By Michael Msika, Julien Ponthus, Abhishek Vishnoi and Geoffrey Morgan
With assistance from Leda Alvim
