One of Wall Street’s most popular predictions for 2025 was the continued dominance of US equities. However, less than two months into the year, confidence in that trade is waning, as global markets begin to take the lead.
Shift in Market Sentiment
According to the February Bank of America Fund Manager Survey, 34% of fund managers now expect global stocks to be the best-performing asset class this year, followed by 22% favoring gold. Meanwhile, US equities have slipped to third place, with only 18% of respondents still believing in their leadership. This marks a significant drop from January when 27% of fund managers backed US stocks to outperform.
Bank of America strategist Michael Hartnett noted that this shift signals a “peak in investor conviction of US exceptionalism.”
Global Stocks Take the Lead
Recent market activity supports this trend. Last week, inflows into European equities surged to a two-year high, according to Deutsche Bank. Year-to-date, the European Stoxx 600 Index has risen more than 10%, significantly outpacing the S&P 500’s modest 4% gain.
Several factors contribute to this divergence. The Federal Reserve has tempered expectations for rate cuts in 2025, with markets now anticipating only a single cut. In contrast, the European Central Bank and Bank of England remain more optimistic about easing monetary policy.
Additionally, economic growth projections show a more favorable outlook outside the US. Consensus forecasts suggest an increase in GDP growth in the UK and eurozone, while US economic growth is expected to slow from 2.8% in 2024 to 2.2% in 2025. The recent weak retail sales report in January has further fueled concerns about a potential economic slowdown in the US.
A Changing Investment Landscape
Chris Watling, chief market strategist at Longview Economics, highlighted the importance of relative expectations, stating, “There’s a bit of a growth issue in the US relative to expectations.” Investors often allocate funds based on where expectations are rising or falling, rather than absolute economic performance.
The improving growth outlook outside the US has drawn investors toward undervalued global markets. As a result, sectors that were previously overlooked, such as materials and energy, have begun to attract attention, with both outperforming in early 2025 after a challenging 2024.
Positioning for a New Market Trend
Tom Becker, lead portfolio manager at BlackRock’s tactical opportunities fund, emphasized the impact of investor positioning: “Some of the positioning indicators we looked at toward the end of last year suggested US equities were a bit overstretched. The risk-return trade-off was more attractive in the ‘unloved’ foreign markets.”
Despite the shifting landscape, few investors are exiting the market. Instead, they are broadening their horizons beyond the big tech stocks that have dominated for the past two years. With cash allocations at a 15-year low, investors are seeking higher returns in global equities and commodities, challenging the once-dominant narrative of US market supremacy.
Conclusion
The era of unquestioned US stock market leadership may be coming to an end, at least for now. With global equities gaining momentum, investors are diversifying their portfolios, looking for opportunities beyond Wall Street. As monetary policies and economic conditions evolve, the race for the best-performing asset class in 2025 remains wide open.
