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The end of American Exceptionalism?
Is it time for investors to pivot into non-U.S. equities?
The Big Picture
Let’s begin by zooming in to a relative performance of different major regions in the past three years. Since the start of 2025, U.S. equities have rolled over in relative performance, while Europe and China have sprinted ahead. Japan and emerging markets ex-China have been market performers.
For another perspective, I use RRG charts to tell the story. Relative Rotation Graphs, or RRG charts, are a way of depicting the changes in leadership in different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which changes to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again.
Not so magnificent anymore
U.S. relative performance has been hampered by the underperformance of the Magnificent Seven, which had been leading global markets. The accompanying chart shows the Magnificent Seven ETF (MAGS) has lagged the S&P 500 since the beginning of 2025.
The U.S. is also undergoing a growth scare. The Economic Surprise Index, which measures whether economic releases are beating or missing expectations, has fallen into negative territory.
Tactically, signs are appearing that the risk reversal may be nearing an end. The Fear & Greed Index has reached levels when the market has bottomed in the last year.
Other sentiment indicators, such as the AAII sentiment survey, show a spike in bearish sentiment to levels where the stock market has bottomed in the past.
Make Europe Great Again
Across the Atlantic, European equities have been strong, buoyed by the promise of more fiscal stimulus from rearmament efforts. Both the Euro STOXX 50 and FTSE 100 recently reached new recovery highs, though the FTSE 250, which is more reflective of the British economy, is languishing.
I am encouraged by the strength in the European Economic Surprise Index, but warn that EU leadership may be slow to react to the rupture in the transatlantic relationship. The political leadership of the two pillars of the EU, Germany and France, each face their own constraints. Germany’s new chancellor Merz won an election, but he needs to negotiate with a partner to form a government. That process can take months, which leaves Germany rudderless during a critical period. In France, President Macron was weakened by the loss of his parliamentary majority. While French presidents have significant power, Macron nevertheless has to contend with a majority of left-wing parties who impede his agenda.
Despite the investor stampede into European defense, my preferred sector in Europe is financial stocks, which has shown a strong relative uptrend that began last August, though they are a little extended on a short-term basis.
An unconvincing rally
Over in Asia, the strength in Chinese stocks looks unconvincing. The rally was led by Chinese technology and internet stocks, which failed at a key resistance level. Conventional indicators of Chinese economy strength, such as the cyclically sensitive base metals/gold and copper/gold ratios, have gone nowhere. China has been a voracious consumer of global commodities and the lack of cyclical strength in commodity prices represents a negative divergence.
Here is another perspective on China and its effects on the global cycle. Even though the CRB Index has rallied, the relative performance of major resource exporting countries is not showing any signs of strength. This represents a cautionary flag about both the sustainability of a Chinese economic recovery and the cyclical outlook of global economic growth.
Key risk
In summary, global equity markets are undergoing a rotation away from U.S. into non-U.S. markets. However, investors should heed the following warning from Bloomberg U.S. chief economist Anna Wong. The current narrative of U.S. weakness is likely to shift to non-U.S. weakness as the Trump tariffs begin to take effect later this year. Particularly vulnerable are current account surplus countries like China, Germany and Ireland, though the latter is attributable to tax avoidance by U.S. companies with Irish subsidiaries. Other vulnerable trade war targets include the former NAFTA trading partners Canada and Mexico.
The week ahead
Two components of my Bottom Spotting Model triggered buy signals late last week. The VIX Index spiked above its upper Bollinger Band, indicating an oversold market, and the term structure of the VIX briefly inverted, indicating fear.
In conclusion, a global rotation analysis reveals a rotation away from U.S. equities. Europe is poised to sustain leadership, and my favourite sector is European financials. China has shown signs of relative strength, which doesn’t appear to be sustainable. The most vulnerable countries appear to be the resource exporters such as Australia, Canada, Brazil, Indonesia and South Africa.
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Ideally, we could benefit from James Cramer’s maxim that there’s always a bull market somewhere.
More precisely, I am interested in knowing in what one can invest that a) has a reasonable P/E, b) good technicals (not a falling knife, not stagnant) and c) not unduly correlated with the S&P 500.
Little sense in investing in Europe if the correlation between SPX and Eurostoxx goes to 1 in the next recession, as it usually does.
Apart from Cam’s good pick Gold, I can’t see very much at all. Ideas?
It can’t be all three are satisfied at the same time. All algos running on all powerful computers in real time in the world will find them in a femtosecond. And then it reverts back to just like the conditions before (at 0- time). After two years of 20%+ returns it should be resonable to have a range-bound market this year. Market is much faster than before so trends don’t last long. We should expect more breakout and breakdown failures. Watch flavors of the day in a merry-go-round fashion of rotation. Today it is insurers and consumer finance. If financials is the favorite, its members should rotate upward. So they would be broker-dealers, capital markets, banks, … I am pretty sure mag7 will be back some time later. Even ARK funds have made a big comeback but now in a consolidation.
Agree 100% about reversion to mean. So, in conclusion, would you do nothing and stay the course?
Great missive today from Cam, thanks. Export is 11% of US economy, on the surface. The two destination countries at the top are Canada and Mexico and there are actually many goods made in US and shipped to the two countries to be put into final products shipped back to US. So in reality the real export is no more than 5% of US economy. In other words, US holds all the cards in negotiating with just about any country in the world. Americans and US have been bled dry the last 30 years by this large scale globalization, resulting in massive debt, and consequently massive drop of USD buying power.
If Europe can be stronger it is a good news for the whole world, including US. But the reality is it will not happen. The best scenario is a lukewarm growth. I don’t care about your political stripes. Reality is reality and it has to be dealt with. Especially if you are on the liberal side the current world setup is going to set you back deeply if you are rooting for failure of America. You can say whatever you want today and do many things without repercussion because there is a stable stucture, largely supported by America, that shield you from many unwelcome things. But things are changing.
It is reshuffling time. Maximum randomness is the only constant.
“It is reshuffling time”.
Into what?
“Americans and US have been bled dry the last 30 years by this large scale globalization”.
This was discussed in the mid 1990s, as a counterargument to globalization. It was predicted that capital would flow from developed countries into developing countries and that pretty much has come out to be true. Labor arbitrage is such that Europe is now being forced to import labor from Asian countries. New Zealand was the first that suffered this demographic curse back in the 1980s, and the same fate has befallen on Western Europe. America is relatively immune from this curse, so far. Such capital transfer has nothing to do with USA, but a fate preordained in demographics. Cam had written about demographic shifts a few yers ago and that was pretty much accurate. Developing countries like India and China will keep developing with or without the US or Western Europe. Stocks in these countries may or may not make money for capital holders from Western countries. However, middle class in these countries will keep getting wealthier. Their buying power will keep changing the global geopolitical power balance. We are already seeing this as China walks away from U negotiating table. Chinese response to US tariffs has been a big yawn, so far. America first has a dark side and that is a shrinking global reach of American power. Such shrinking American footprint should be seen as destabilizing to risk assets, prone to conflicts and wars. Behind America first, is the massive debt owed by America that we need to focus on. The inflation we see in America has much to do with expanding American deficits and not the political blame game that is being played out by the current administration. Cam’s call on gold IMHO should be seen as a longer term call of money flowing away from US $. US $ is strong right now, and gold is close to all time highs. As a waning power, American $ is likely to lose value and gold likely continues to rally even more. All of this is pre ordained and plainly obvious to many quiet voices globally.
In near term, I am watching the developments in Europe which is likely to divorce itself from American/NATO defense treaties. Germany (and Japan?) may rearm itself. These developments should all be seen as lack of American leadership. Under the hood, much changed in the last few weeks as regionalism asserts itself. As far as stocks, a resurgent Europe may be a positive for European stocks in the longer term?
I guess the Answer to:
What should you buy to save yourself some shekkels in this type of Volatility and Unpredictable World?
Nothing, apparently. No safe harbors, everything goes down together.
To Quote Ken: “We are all in this together.” takes on a bigger meaning. Hang in there. My portfolio is still doing well. Not rubbing it in, looking at it more like, “Glass is still half full.” =)
An amazing trading day in the market. The whip-saw was incredible. In the morning, due to the spike in VIX, I was able to sell way OTM (large) premium SPX puts, then when the market bounced in the afternoon, sold way OTM SPX calls. These are daily options with only 2-3 days expiry, so the theta is huge!