By Krystal Hur
The U.S. stock market, long the envy of the rest of the world, is losing some of its allure.
Many investors had anticipated that American exceptionalism — the perceived advantages the U.S. has over other countries, such as its economic strength and technological innovations — would help drive another year of robust stock gains.
But worries about a trade war, signs of flagging growth and splinters in the AI trade have taken some of the shine off that optimism. Stocks posted new declines Monday after President Trump over the weekend refused to rule out a recession this year, exacerbating Wall Street's fears of a coming slowdown. The Dow Jones Industrial Average lost more than 700 points in afternoon trading.
While the U.S.'s strength is in question, other countries are ramping up efforts to revive their economies. China has unleashed more stimulus to meet its economic growth target. Germany announced a spending splurge on its military and infrastructure.
Markets were rattled after Trump's tariffs on goods from China, Canada and Mexico took effect, sparking swift retaliatory action. Stocks, bond yields and oil prices tumbled, with investors scrambling to assess the possible implications of a trade war on the U.S. economy.
The S&P 500 fell 3.1% last week, wiping out its postelection gains and pushing it into the red for 2025, a rare stint of underperformance versus many global peers. The Nasdaq Composite entered correction territory, a drop of 10% or more from its recent high.
Investors had largely brushed off Trump's inflammatory policy promises, including his pledge to levy aggressive tariffs on major U.S. trading partners, betting they were negotiation tools that wouldn't be implemented.
Now, the expected ramifications of tariffs, which many investors fear could reignite inflation and break the economy's resilient streak, has some worried that the case for American exceptionalism isn't as sound as they expected. For many investors, the dizzying sequence of events is also a sign of the uncertainty that lies ahead.
"The desire to believe in American exceptionalism is very strong," said Matt Rowe, head of portfolio management at Nomura Capital Management. "The reality is that if we're doing everything on our own, everything is going to be a lot more expensive."
Trump's tariffs have also dulled the once-gleaming AI trade. Nvidia, the leader of the pack, has lost more than $900 billion of market value since its peak in January, through Friday's close. The Magnificent Seven tech stocks — Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — are lower for the year, excluding Meta.
Meanwhile, on the economic front, the Federal Reserve is in the midst of a wait-and-see phase for interest rates, putting off long-awaited relief for stretched consumers and businesses. Friday's jobs report suggests that the labor market remains steady, but showed signs that it could weaken.
In the coming days, investors will parse key inflation reports for February. They will also comb through earnings reports from the likes of Oracle, Dollar General and Ulta Beauty for insights into how companies will weather sweeping policy changes under Trump.
Already, some companies have issued warnings. Target said Tuesday that escalating tariffs and declining consumer confidence could weigh on its profit and lead to flat sales this year. Best Buy, which sources many of its products from China and Mexico, said Americans will likely see higher prices from retailers passing on elevated import costs.
Analysts warn tariffs could dent corporate earnings, an especially critical driver of the stock rally. Goldman Sachs predicts that per-share earnings among companies in the S&P 500 could drop by roughly 1% to 2% for every 5-percentage-point increase in the U.S. tariff rate.
"You've got to wonder if we're looking at this a week from now, or even a month from now, what the market response is going to be," said Matt Stucky, chief portfolio manager of equities at Northwestern Mutual Wealth Management. "The market is not exactly cheap."
Investors have worried for months that the lofty stock valuations could weigh on long-term returns. The S&P 500 was recently trading at 21 times its expected earnings over the next 12 months, above its 10-year average of 19 times.
For some, actions from corporate insiders, who are often viewed as market bellwethers, have signaled that U.S. stocks could be headed for trouble. JPMorgan Chase Chief Executive Jamie Dimon warned in January that economic headwinds could make it difficult for companies to justify their sky-high stock prices.
"Asset prices are kind of inflated," Dimon told CNBC at the World Economic Forum in Davos, Switzerland. "I'm talking about the U.S. stock market. But it's not true for stock markets around the world."
Some corporate leaders have reduced their U.S. stockholdings. Warren Buffett's Berkshire Hathaway plans to increase its stakes in Japanese stocks, after building up a record $321.4 billion pile of cash and Treasury bills. Mark Zuckerberg has sold more than $500 million worth of Meta's stock this year, according to S&P Global Market Intelligence data. Meta said the stock sales are part of a prearranged trading plan. Both Zuckerberg and Amazon's Jeff Bezos unloaded billions of dollars worth of their companies' shares in 2024.
U.S. stocks rallied furiously in 2023 and 2024, driven by artificial-intelligence fervor and the economy's resilience against higher interest rates. Generally robust corporate earnings growth helped propel the stock market to dozens of record highs.
In 2024, the S&P 500 outperformed the MSCI World ex USA index, which tracks the performance of developed markets, by the widest margin since 1997. Longer term, the index has averaged 16% in annual total returns since the end of 2008, above the MSCI World ex USA index's roughly 8% return.
But the U.S. benchmark has lost some of its edge this year. Germany's DAX index and France's CAC 40 are up about 16% and 10%, respectively, through Friday's close, trampling the U.S. benchmark index's performance. Hong Kong's Hang Seng Index has surged 21% and South Korea's Kospi is 7% higher.
The U.S. market's dominance over those of its peers has also faltered in recent weeks. The U.S. recently accounted for roughly 49% of the global market capitalization, according to FactSet. In January, its share was about 52%, a record in FactSet data going back to 2001.
Zehrid Osmani, a portfolio manager at Martin Currie, says his firm owns European stocks with AI exposure because of how expensive American stocks have become. He also recommends that investors buy cheaper stocks in countries like Japan and China. He is watching to see whether Trump slaps tariffs on other countries.
"Any scenario here is possible," said Osmani.
Write to Krystal Hur at krystal.hur@wsj.com
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