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(Bloomberg) — The animal spirits that sent the US stock market flying over the past two years are going global — a trend that some market pros say may be just getting started.

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After soaring more than 50% combined in 2023 and 2024, the S&P 500 Index has largely flatlined since US President Donald Trump’s inauguration. The hot trade is now moving overseas, with investors piling into European and Asian stocks, ignoring the threats of tariffs, trade wars and violent military conflicts. 

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Since just before Trump took office, the Stoxx Europe 600 Index is up 5.8%, while the Nasdaq Golden Dragon Index, which tracks US-listed companies that do business in China, has soared 18%. In contrast, the S&P 500 gained a mere 0.3% in the period — with the underperformance intensified by Friday’s one-day 1.7% swoon. 

“Because sentiment and positioning in US equities was so extreme for so long, this reversal can now go a long way,” said Brad Conger, who oversees about $20 billion as chief investment officer at Hirtle Callaghan.

Conger cited an investor poll from Goldman Sachs Group Inc. in late January, which found that global portfolio managers overwhelmingly believed US equities will post the best returns in 2025. This one-sided sentiment is one reason he’s been going the other way: Conger’s firm has been overweight European stocks since mid-2024 and Chinese equities since late last year. 

For traders who are doing the same, the logic is straightforward. Stocks outside the US missed much of the gains of the past two years and are now looking relatively cheap as the global economic outlook has stabilized. At the same time, uncertainties about tariffs have mainly weighed on sentiment in the US, and the dollar’s strength has faded.

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Meanwhile, excitement around the Chinese artificial intelligence startup DeepSeek has led investors to reconsider the steep prices in US equities, and made China tech stocks more appealing in the near term. Taken together, all of these forces are shaking up the “US exceptionalism” thesis in which American markets are expected to consistently outperform their peers. 

“This shift has the potential to be secular, not cyclical,” said Mark Hackett, chief market strategist at Nationwide Investment Management Group, that has about $75 billion of assets under management. “The only other time on record that had a performance and valuation gap this wide between domestic and international markets was during the technology bubble. When the shift came then, it was dramatic and extended.”

Global equities lagged the US significantly over the past two calendar years, with the Stoxx 600 rising 20% and Golden Dragon gaining just 1%, even as the S&P 500 soared 53%. Even after this year’s catch-up, the average price-to-earnings multiple for the European gauge stands at 14, below the S&P 500’s at 22. The China index multiple is at 17.  

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Follow the Money

Money flows suggest a long potential runway ahead for non-US stocks. An analysis from JPMorgan Chase & Co. found that excluding Chinese equities, this year’s relative underperformance of US stocks still represents only a 10% to 20% reversal of the pro-US investment theme that ruled from April 2023 through the end of last year. Citigroup said positioning has flipped so “dramatically” in favor of Europe, that investors are now more bullish on Europe than they are on the US. 

The upcoming US tax-paying season in March will be another headwind for the S&P 500. Equity buying from retail traders — a key force in American markets — can slow down as tax season comes closer. In fact, Goldman’s Scott Rubner last week said he was on “correction watch” for the equity benchmark as both retail and institutional buyers are running out of steam.

In Europe, meanwhile, the rush into German stocks or broader European equities suggests investors are being driven by a fear of missing out, said Christopher Murphy, co-head of derivatives strategy at Susquehanna International Group. He noted that implied volatility in both Germany’s DAX Index and the Euro Stoxx 50 Index has climbed sharply in recent weeks. 

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“It is very rare to see a macro index rallying and volatility moving higher considerably,” Murphy added.

Too Fast?

But there are fundamentals underpinning the move. Beyond Europe’s lagging valuations, the outlook for interest rates is more benign, while corporate earnings have been resilient. Budding optimism around a potential ceasefire in Ukraine is also a plus, as are expectations for increased spending to help keep any peace, which has helped European defense companies in particular.

For some, the stampede into Europe and China has been so breakneck that it may be due for a pause. Gauges of momentum for both the Euro Stoxx 50 and Hang Seng China Enterprises Index suggest they have risen too far too fast, something that may signal a reversal is on the horizon, if not imminent, said JPMorgan’s global market strategist Nikolaos Panigirtzoglou. 

Others still see plenty of reasons to keeping betting on the US, even with the S&P 500 still near all-time highs. 

“The US has key structural advantages,” said Bank of America’s equity strategists led by Savita Subramanian, noting its energy independence, fungible labor force, and the reserve currency status of the dollar.  

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America’s technology industry also continues to be on top, the strategists said, though the launch of DeepSeek has challenged the notion of US’s dominance in that field.

Even a little wobble in confidence about the superiority in US tech giants can go a long way, though, given their disproportionately large influence on the country’s stock market. And at a time when the tide is flowing in the other direction, every factor adds up. 

“The AI narrative was the justification for the extreme bullishness in US stocks,” Hirtle Callaghan’s Conger said. “It would not have been possible for non-US equities to outperform had there not been a readjustment of the AI expectations in the US.”

—With assistance from Natalia Kniazhevich, Jessica Menton, Yiqin Shen, Sagarika Jaisinghani and Abhishek Vishnoi.

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