US shares surged to record highs after Donald Trump won the US presidential election in November, but the rally has faded in 2025. Stock markets famously hate uncertainty, and the only certainty about Mr Trump's second term is that we will get plenty of that.
Markets fear tariffs on Mexico, Canada, China and the EU could rebound on the US, driving up prices, hitting demand and causing a recession. A slowdown would punish international investors too, many drawn by the success of US tech mega-caps.
The S&P 500 is trailing this year, closing at 5,954.5 on February 28, up just 1.46 per cent year to date. In contrast, the FTSE 100 is up 6.7 per cent, the Euro Stoxx 50 is 11 per cent higher, and Hong Kong’s Hang Seng has risen 17 per cent.
The US has been the worst-performing major market over the past three months, moving sideways as the November’s “Trump bump” fades, says Tom Stevenson, investment director at Fidelity International. “The post-election consensus that ‘America first’ would mean ‘rest of the world second’ has, in stock market terms, been wrong.”
While the US is priced for perfection, markets like Germany have been written off. “When sentiment is that extreme, it doesn’t take much for the pendulum to swing back,” Mr Stevenson says.
BlackRock, the world’s biggest investment manager, has just upgraded Europe, noting its relatively strong start to the year. Jean Boivin, head of the BlackRock Investment Institute, cites easing energy costs, potential fiscal stimulus in Germany, low valuations and possible de-escalation in Ukraine. “With bad news priced in, even small positive developments could help push European equities higher.”
Higher defence spending and further European Central Bank rate cuts could further boost the region, he adds.
Jason Hollands, managing director of London-based financial adviser Evelyn Partners, says early bullishness over potential corporate tax cuts in the US, deregulation and tackling government waste under Mr Trump have faded. “Now investors are focused on his unpredictability, aggressive approach to trade and upending of long-established foreign policy and defence alliances.”
Mr Hollands adds: “While Mr Trump’s statements are often blunt and undiplomatic, his views can also swiftly change, which is disconcerting for markets.”
This anxiety can clearly be seen in the crypto market, with Bitcoin plunging more than 20 per cent, from $104,000 to $85,000 in a matter of weeks. The cryptocurrency again soared on Monday after Mr Trump announced the names of five digital assets he expects to include in a new US crypto strategic reserve, including Bitcoin, Ether, Ripple, Solana and Cardano.
Yet Mr Hollands suggests Mr Trump will be unwilling to overplay his hand. “As a businessman who regards the stock market as a key yardstick for success, he’ll want to land deals he can point to as wins for the US.”
Investors forget, but the US stock market and the dollar slumped in the first year of Mr Trump's previous term, says Paul Jackson, global head of asset allocation research for Europe, Middle East and Africa at fund manager Invesco. “We’re seeing a replay of that but with more chaos, amid tariff threats, government layoffs and a swift reversal of Joe Biden’s policies.”
The University of Michigan Consumer Sentiment Index showed a dip in US consumer confidence in January, plus a large jump in inflation expectations. “So many policy changes in such a short space of time is unnerving for businesses and households and will discourage investment and big ticket purchases,” it said.
Such changes will also make life difficult for the US Federal Reserve, which may be caught between cutting interest rates as growth weakens, or holding them to fight inflation. “I doubt any of this is good for the US dollar or US assets,” Mr Jackson says.
China, Europe offer diversification
US equities already look expensive and heavily concentrated in Big Tech, and may be due a period of consolidation, he adds. “European and Chinese equities look much better value, and I’m not surprised they’re outperforming.”
Europe’s economic performance has been patchy, but could improve as interest rates fall, real incomes increase and defence spending climbs, Mr Jackson adds.
China’s economy has done better than many realise, growing at an annual rate of 5.4 per cent in the fourth quarter. “Yet stock market valuations are well below historical norms, while the DeepSeek announcement served as a wake-up call to those who thought China was lagging in the technology race,” he says.
Charu Chanana, chief investment strategist at Saxo Bank, says markets fear US exceptionalism may be fading as economic data softens and AI momentum cools. “Trump’s tariffs are also weighing on business investment, which may further hinder capital expenditure and growth even if they just remain a negotiating tool.”
However, Tony Hallside, chief executive of Dubai-based broker STP Partners, says the US still remains strong, driven by resilient corporate earnings and innovation, particularly in technology and health care.
A mix of high-quality US stocks, defensive assets like gold and bonds, and select opportunities in Europe and Asia should create a more resilient portfolio and support diversification, Mr Hallside says. “This isn’t a time to step away from US equities but to take a broader view.”
Vijay Valecha, chief investment officer at Century Financial, says a potential peace deal in Ukraine has created “bullish euphoria buying in Europe among some European investors”, particularly in France and Germany. “China is outperforming due to a big uptick in Chinese tech names after the DeepSeek-related narrative, although ongoing property market issues could delay the recovery.”
Investors could up their exposure to these two regions through broad-based exchange-traded funds (ETFs) such as FTSE Developed Europe or MSCI Europe, or the HSBC MSCI China UCITS ETF or iShares MSCI China UCITS ETF.
chief executive, STP Partners
Mr Valecha also highlights three more ETFs that could offer diversification. The iShares MSCI ACWI ETF invests in a spread of large to mid-cap stocks from top developed and emerging markets. While the US has outpaced all other major developed markets, this ETF can hold its head up. The ETF is still 65 per cent invested in the US, with the remainder spread between Japan, the UK, China, Canada, Europe, Taiwan, India and Australia.
The gold price has climbed another 10 per cent this year to about $2,863 an ounce and Mr Valecha recommends exposure through the SPDR Gold Shares ETF. “As Russia and China dump US Treasuries for gold-based physical bullion holdings, gold remains a good diversification bet.”
Meanwhile, the iShares 20+ Year Treasury Bond ETF is “often cited as the most underrated ETF of all”, he says. “During market turmoil or a recession, long-term Treasury bonds tend to rally as investors seek safe havens. If Fed interest rate cuts materialise or we face a recession, the ETF could enjoy sizeable gains.”
America has been first for years. But investors should not write off the rest of the world just yet.
