That said, there are always going to be business and economic cycles where the US and other nations experience downturns. A slowdown in US and global growth was already happening prior to tariffs entering the equation. This may not have resulted in a recession this year; however, the situation has become more complicated and thus more uncertain. Ironically, as the current US administration has sought to realign global trade, this has driven Europe to seek greater self-reliance, which has the potential to reinvigorate its economy and drive relative equity returns over the coming years.
Can two things be true at the same time?
Yes, the US can maintain its exceptionalism while other developed economies such as Europe and Japan stimulate and improve their economic situation, resulting in attractive equity return opportunities in their local equity markets. In our view, Europe can start to play catch-up due to the abrupt, massive U-turn in fiscal policy. This, coupled with a continued push toward increasing shareholder value, offers return opportunities for investors but will, however, take time.
- Europe’s fiscal stimulus: The European Union recently announced a significant fiscal and defense plan – ReArm Europe. Specifically, Germany approved a €500 billion infrastructure investment fund, the largest fiscal package in decades, to modernize infrastructure and boost defense spending. This stimulus is expected to lift eurozone growth and corporate earnings, particularly in industrials and green energy. While this has yet to be passed and implemented, the mindset and willingness to embrace this expansion is positive for investor sentiment.
- Shareholder value focus: Japan’s corporate governance reforms are driving higher returns on equity (ROE). Share buybacks surged in 2024, and companies are reducing excess cash holdings to improve capital efficiency. Similarly, European firms are prioritizing shareholder returns amid pressure to align with stricter governance standards.
What is an investor to do, and how should it be timed?
Given our view that the end of US exceptionalism has been overplayed, an argument can be made for short-term mean reversion that sees a shift back to favoring US equities. However, for investors with a medium- to longer-term horizon, there is a decent runway and a growing case to increase global allocations. Given strong relative returns out of Europe this year, you might think that you’ve missed the boat. But, as the table below shows, most of those returns are due to dollar weakness. Local returns are up, but this may be just the beginning.
Region performance (01/01/2025–05/07/2025)
