One of Wall Street’s most popular calls in 2025 was for continued US “exceptionalism” in the stock market.
But less than two months into the year, confidence in that trade is waning and the alternate scenario we laid out in December, where the rest of the world outperforms US stocks, is playing out.
In the February Bank of America Fund Manager Survey, 34% of fund managers said global stocks will be leading the asset class this year, followed by 22% listing gold. Meanwhile, US equities dropped to third in the rankings, with 18% saying the asset class will once again lead this year. In January, 27% of respondents had picked US equities to lead.
Bank of America strategist Michael Hartnett wrote in a note to clients this shift shows a “peak in investor conviction of US exceptionalism.”
Recent market action bears out this sentiment too. Last week, inflows into European equities jumped to a two-year high, according to Deutsche Bank. For the year, the European STXE 600 (^STOXX) has risen more than 10%, outpacing the S&P 500’s (^GSPC) roughly 4% gain.
Strategists have highlighted a few reasons for the divergence that say just as much about the shifting backdrop for US stocks as they do about the European rally. For one, markets have grown less optimistic about Federal Reserve interest rate cuts in 2025 and now only expect a single cut this year.
As UBS Asset Management’s fixed income investment specialists team pointed out in the latest Yahoo Finance Chartbook, those expectations have diverged from those of the Bank of England and the European Central Bank, which still feature far more optimism around rate cuts.
This comes as consensus projections for economic growth show gross domestic product (GDP) increasing in 2025 from the year prior in the United Kingdom and the eurozone. Meanwhile, consensus currently sees the US economy growing at a 2.2% annualized pace in 2025, down from the 2.8% pace seen in 2024.
Additionally, recent economic developments, including a surprisingly weak retail sales report in January, have economists already warning that the first quarter could see weaker economic growth than initially thought.
“There’s a bit of a growth issue in the US relative to expectations,” Chris Watling, Longview Economics global economist and chief market strategist, told Yahoo Finance’s Morning Brief show on Tuesday.
As Watling noted, “relative to expectations” is the key here. In markets, where investors want to put their money often centers around where expectations are rising or falling. It’s the rate of change, not the absolute level. And investors like Watling like the improving growth story in economies outside the US.
It’s particularly attractive when you consider where investors were positioned entering the year. Markets have been all about US exceptionalism, pushing US equity valuations to levels rarely seen in history.
“We put a lot of weight on what’s priced and investor positioning,” Tom Becker, BlackRock lead portfolio manager of the tactical opportunities fund, told Yahoo Finance’s Catalysts show Tuesday. “Some of the positioning indicators that we look at toward the end of last year looked a little bit overstretched in the US.”
To Becker, and clearly some other market participants, this meant the risk-return trade-off was more attractive in the “unloved foreign markets.” The same point could be made for some of the S&P 500’s top-performing sectors this year like Materials (XLB) and Energy (XLE), which were among the worst performers last year.
As BofA’s survey showed, with investors’ allocation to cash at a 15-year low, few are looking to get out of this market.
Instead, investors are just seeing a higher likelihood of outperforming the market beyond the small group of tech stocks we’ve all been talking about for the better part of two years.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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