US market under-performance: Are we in uncharted territory?

So far, 2025 has not been a great year for US assets.

Firstly, the trade-weighted dollar has lost more than 4% of its value.

Secondly, US stock markets are down -4% for the broad S&P500 and an even deeper -8% for the technology-rich Nasdaq composite.

The so-called Magnificent Seven are in trouble: six of them are down, by double-digits for Tesla, Apple and Alphabet.

Finally, but crucially, it’s not a broad, global issue as some other stock markets are behaving much better. Expressed in US dollars, the MSCI China is up 20%, Europe gains 14% and the UK 10%. Japan and the GCC are also positive.

This is not business as usual, especially as Wall Street strategists were almost unanimously bullish on US stocks, with most of them also positive on the dollar. The extremely consensual idea was that US exceptionalism will only be amplified by ‘America First’ pro-businesses policies, and therefore, the US will continue to prosper, in part at the expense of all others.

Well, markets tell us to think again.

First, as we highlighted in our ‘2025 Global Investment Outlook’, policy action in the US is a shockwave to which the rest of the world has to respond. And it does. 

Europe opens the spending spigot

Germany just reached a final agreement between the ruling coalition and the Greens this weekend for an historical relaxation of their budget rules, allowing for massive public spending on infrastructure and defense.

Looking to the east, China unapologetically rises to the US challenge on all fronts: on AI, with the spectacular emergence of competitive models; on tariffs, with proportionated responses; on geopolitics, by filling the soft-power void left by America First domestic priority; on growth, with an unchanged – thus ambitious- target for 2025, supported by a significant fiscal stimulus package.

Still, this is not just relative underperformance: US assets are down in absolute and investors are concerned about the future trajectory of growth. The perspective of tariffs, with unpredictable announcements, is taking a toll on consumers’ morale.

Their inflation expectations are on the rise, and the latest consumer sentiment survey from the University of Michigan shows a material drop. Additionally, Elon Musk’s Department of Government Efficiency seems to be extremely serious about cutting government expenses – which will have a direct recessionary effect as the weight of the US Government in its economy is massive.

US Treasury Secretary Bessent is aligned, as he declared that the administration aims at ‘re-privatizing’ the economy. He also said over the weekend that he is not worried about the recent market downturn. Some were hoping that market pressure would change the course of the administration – they are disappointed.

While growth concerns are not baseless, we must point out a few facts.

First, all the data we have so far indicate some level of moderation, but also a clear resilience, including on the labor market. The US economy still looks very healthy.

Second, February inflation reports from last week provided positive surprises. It wasn’t massive, but CPI and PPI, both at headline and core levels, all came out slower than the median forecast. All of them. Finally, US Treasury yields did not dive to the deep levels that they usually reach when recession panic triggers a flight to quality.

A ’common’ correction

In essence, we are not sure that the current market correction is the sinister omen of an upcoming collapse in activity. It looks like a much more common correction of the most expensive, and over-owned, segments of the market.

The darlings - the US within developed markets, India within emerging markets, but also tech consumer durables, all meet these criteria.

This is why we decided not to change our asset allocation in March: we stay neutral on equities, and even increased our US allocation. So far, we see no evidence of a US recession, and are not unhappy to see valuations becoming more reasonable.

A recession remains possible, of course, especially if the US dramatically cuts its government expense. This, another theme of our 2025 Outlook, would trigger initial pain for risk-assets but would be very good news for the long-term.

The world is changing, but long-term investors don’t have to reposition their portfolios each time the market moves.