Wall Street continues to be bullish, and U.S. assets are expected to lead globally next year

According to the Zhitong Finance APP, this week, U.S. inflation data accelerated, Donald Trump threatened to impose aggressive tariffs on some of America's neighbors, and half of Wall Street investors are on vacation, yet the S&P 500 index still easily outperformed benchmark stock indices in Europe and Asia. Both sell-side and buy-side institutions, from UBS Group AG to Fidelity International, believe that the U.S. capital markets will continue to dominate globally in 2025.

Since 1997, U.S. large-cap stocks are approaching their best performance year relative to other regions of the world. Despite interest rates remaining high, U.S. corporate borrowing has been unusually easy. Day traders are enjoying historic gains from speculative bets ranging from leveraged ETFs to cryptocurrencies.

During the shortened trading week, the U.S. market's strong performance was once again evident, with market activity remaining robust. First, investors reacted positively to President-elect Trump's announcement of his Treasury Secretary plans. Just days later, his tariff threats triggered market volatility, while a potential inflation indicator favored by the Federal Reserve subsequently rose in October.

The S&P 500 index rose 1.1% this week, while the Chicago Board Options Exchange Volatility Index (VIX), which measures hedging demand, fell to a four-month low. The yield on 10-year U.S. Treasury bonds dropped by 22 basis points.

In contrast, French government bonds were clear losers amid domestic political turmoil, with yields relative to similar German bonds reaching their highest level since 2012. The Stoxx Europe 600 index closed up just 0.4% this week, while the MSCI Asia Pacific Index rose by 0.8%.

Data compiled by Barclays' EPFR showed that despite the widening valuation gap between U.S. assets and those in the rest of the world, funds flowing into U.S. stocks have accelerated over the past month, while Europe and emerging markets have seen capital outflows.

Fidelity International portfolio manager Caroline Shaw stated on Wednesday, "From a bird's-eye view, we lean towards the U.S. Earnings growth will remain strong."

Since the pandemic, the U.S. economic growth rate has outpaced that of other developed countries. The optimism that this trend will continue is pervasive, stemming from the belief that Trump's policies will boost the domestic market while his trade protectionism will harm other regions of the world. While economists have raised their forecasts for U.S. economic growth next year, predictions for Europe have been downgraded.

"Extreme Dislocation"

Despite the current strong performance of the U.S. market, it remains to be seen whether this strength can be sustained and withstand any negative consequences from its policies. Adam Slater of Oxford Economics wrote this week that if "the U.S. significantly raises tariffs and faces massive retaliation," the market's optimism may be premature.

Meanwhile, as global central banks re-enter easing mode, Invesco expects Europe to outperform the U.S. due to lower valuations and a higher weight of cyclical industries. Bank of America strategists noted that the "extreme dislocation" between bullish views on U.S. assets and bearish views on other regions of the world could lead to underperformance for the U.S However, bets on the U.S. stock market have repeatedly proven successful, and it turns out that the high valuations of U.S. stocks have not become an obstacle to further increases. Over the 15 years since the global financial crisis, U.S. stocks have outperformed other regions of the world, except for two years. Barclays stated that this has pushed its weight in the Morgan Stanley Capital International Global Index (MSCI World Index) to an all-time high, while Europe's weight has hit a historical low.

Ben Kumar, head of equity strategy at Seven Investment Management, said, "If other companies in the S&P 500 start making as much or relatively as much money as the large tech companies, then U.S. market valuations will quickly start to look reasonable." "There is definitely a sense that you have to hold U.S. assets because it is doing something different."

For UBS, there are clear reasons to expect that U.S. stocks will further outperform other regions next year, based on factors such as potential tax cuts and regulatory easing. A team led by Andrew Garthwaite wrote, "Among all major markets, the U.S. has the lowest operating leverage, so if global economic growth slows, the U.S. will perform better." "The U.S. will benefit relative to other places from Trump."