A Wild Quarter for U.S. Stocks Sends Investors Abroad
Tariff uncertainty and a flagging tech trade drag the S&P 500 and Nasdaq lower to start 2025
Worries about tariffs and the economy sent the S&P 500 and Nasdaq Composite to their worst quarters since 2022, a setback that is pushing some investors overseas..
The Trump administration’s whipsaw rollout of a tariff fight with America’s biggest trading partners has analysts trimming forecasts for economic growth and lifting estimates for inflation. The tech trade that carried indexes to new highs is fizzling. Investors big and small have been shifting bets to Europe—where new spending plans could jolt a lethargic economy—and beyond.
Monday’s action highlighted the volatility pummeling markets in recent weeks. U.S. stocks opened sharply lower following a global selloff overnight, before an afternoon rally carried the broad index to its largest intraday recovery in more than two years.
“For the first time in a while, you can have a conversation about: Might European equities be the best place to be for the next two or three years?” said John Porter, chief investment officer at Newton Investment Management, which has been buying European stocks in many of its strategies in recent months. “You can have that conversation for reasons other than they’re cheap.”
The S&P 500 is struggling to claw its way out of a correction after falling 10% from its February record. The tumultuous quarter has left the U.S. stock benchmark down 5.1%, far behind the gains of indexes overseas. The dollar has weakened, leaving investors wondering if the pullback from investing in U.S. assets heralds the start of a long-term regime.
It is a far cry from the end of 2024, when the S&P 500 capped a second consecutive year of more than 20% gains. Cooling inflation had allowed the Federal Reserve to lower interest rates three times in a row. Election Day victories by President Trump and congressional Republicans seemed to presage tax cuts, deregulation and boom times ahead.
Few money managers are ready to proclaim an age of European dominance. But some are considering the possibility that years of middling results from the continent’s stock markets could give way to sustained strong performance.
While European stocks have long been cheaper than U.S. shares relative to companies’ earnings, the continent’s sluggish economy and less tech-oriented market had turned off many investors.
Now, with the U.S. warning Europe not to take its military protection for granted, Germany and other countries have announced major increases in defense spending that some economists think could jump-start the region’s economy.
Investors are rushing to get in on the action. The Stoxx Europe 600 index has outpaced the S&P 500 by 11.9 percentage points so far this year, on track for its largest quarterly lead since the start of 2015, according to Dow Jones Market Data. Among defense stocks in Europe, Rheinmetall in Germany has more than doubled while Thales in France has climbed 78%.
Bank of America’s March global fund manager survey showed a record rotation out of U.S. stocks, leaving a net 23% of respondents underweight shares of American companies. Preference for eurozone equities, meanwhile, leapt to its highest level since July 2021.
For European stocks to lead over the long term, many investors say governments would need to adopt business-friendly policies such as eased regulation. Last year, former European Central Bank President Mario Draghi proposed wide-ranging changes intended to boost Europe’s productivity.
At T. Rowe Price, the asset allocation committee has been favoring international stocks over U.S. shares as it looks out over the next six to 12 months, said Sébastien Page, head of global multiasset and chief investment officer. But Page, who oversees more than $550 billion for the firm, isn’t calling for a decadelong regime shift.
“Long term, I still think that U.S. tech dominance will continue,” he said. “You can’t count U.S. tech out.”
Big U.S. tech stocks have powered the market higher in recent years. Since the end of 2019, Nvidia shares have soared roughly 1,800%, while Apple has advanced about 200% and Microsoft 140%. That compares with gains of 73% for the S&P 500 and 30% for the Stoxx Europe 600.
The tech giants have pulled back recently. Nvidia, the darling of the artificial-intelligence boom, stumbled after the emergence in January of an AI model from Chinese company DeepSeek that appeared to rival Western versions while using less-advanced chips. Its shares are down 18% this year, while Apple and Microsoft have fallen 13% and 10%, respectively.
Most S&P 500 sectors are higher so far this year. Groups that tend to be resilient in downturns, such as healthcare, consumer staples and utilities, have advanced, but so have financials, a segment whose fortunes are closely linked to the health of the economy.
Still, investors’ nerves remain evident. Gold, seen as a haven in times of trouble, has rallied 17% this year and is trading at records. And investors who have grown more worried about the economic outlook have snapped up Treasurys, driving the yield on the benchmark 10-year note down to 4.254%, from 4.577% at the end of last year.
While consumer sentiment has dropped, the labor market has remained in decent shape and retail sales rose modestly in February. Many investors think the economy can continue to hum along—especially if the U.S. settles on a trade policy so businesses can plan their next moves.
“If that uncertainty continues for a very long time, I think you’re just going to see a lot of people sitting on their hands, not making a decision on capital budgets for the year, projects, hiring,” said Tiffany Wade, senior portfolio manager at Columbia Threadneedle Investments. “That would have some serious negative economic repercussions.”