Foreign Markets Continue Broad Rally as US Markets Remain Selective
The US administration continues to reshape global economic order, creating risk and opportunity for global stock and bond investors. This is evident from the significant decline in the US dollar, the long-awaited broad rally in overseas stock markets, as well as the selective behavior of stocks advancing here at home. Given the dramatic plummet (-20%) in global stocks in April and the inherent tariff/recession concerns at that time, it is stunning to see that stock indexes have managed to fully recover and reach marginal new highs. However, as we will discuss, the shape of the recovery in global equities has changed, which provides a hint as to what’s to come over the next year and possibly beyond. The US economic playbook that favored US exceptionalism, superior economic growth, and stock price performance has been “tossed out” in favor of a very new “experimental” playbook that will likely create headwinds for the US economy and some US stock sectors. These policies, in turn, have created opportunities for foreign economies and markets. We have arrived in a “new world order,” so let’s dig in as to where the opportunities – and the risks – lie for investors.
US Economic Trajectory Creates Selective Market
According to our research, the administration’s economic policies are likely to reduce domestic growth. The combination of significant tariffs, labor force reduction through immigration policy, and a protectionist trade posture will likely reduce GDP growth from its current 2.5% annual growth rate by 1.5%, taking the US economy to a much slower – almost stalled – pace of around 1%. This slower growth does not leave much room for policy error or the risk of tipping into recession. Thankfully, policies such as financial deregulation and the leadership of AI here in the US could provide enough of a tailwind to make up for any future policy error and help to avoid a recession. Additionally, the administration’s “new world order” policy changes have had a negative impact on the US dollar, which has declined nearly 10% this year. The decline of the dollar might be the result of a number of issues including, most obviously, a reduced level of foreign investor confidence. Given all the confusion around US policy and potential slower growth, how does one explain that US stock indexes have recently risen to new all-time highs? Put simply, “few are carrying many” when it comes to stock indexes reaching these new levels domestically. Upon closer examination, mega-cap technology stocks (The Magnificent Seven) have once again been responsible for the “bulk” of the US market's advance. Beyond large-cap tech, there has also been a raging bull market in US financial stocks. Your portfolio is intentionally overweight these two sectors, and their outperformance doesn’t surprise us – AI and financial deregulation are really the only two bright spots in the US, given the economic headwinds discussed previously. Fortunately, the US is the leader in AI, and this has been a godsend, given that most other stocks are trading sideways or down for the past two quarters. An entire stock market cannot remain strong forever based on just a couple of sectors – but it can do so longer than one might think. It is possible that the US stock market performance begins to broaden to include many or all the other sectors, as investors begin to favorably discount a healthier US balance sheet (less debt) resulting from tariff revenue and less government spending – both of which are questionable remedies. In the meantime, the current price of AI stocks is not yet at “bubble” valuations, but we will be watching this closely and applying our Active Risk Management tools to manage that risk along the way. It is not hard to imagine a day when AI stocks will have discounted all the best news and will start heading significantly lower. As in past tech cycles this may end very badly – however our Active Risk Management is intended to mitigate this risk for you. To sum up, the US “new world order” policies have created headwinds for our domestic economy – and for many companies outside of the AI and financial sectors.
Foreign Economies Begin Phase of Accelerated Growth
These “new world order” US policies have invited foreign countries to adopt our “old playbook,” and markets overseas are celebrating. The US policy of withdrawing significant financial support from foreign governments has created a reinvigorated fiscal spending spree – particularly in Europe. This, coupled with accommodative monetary policy, has sent stocks soaring. Rigorous fiscal spending and low interest rates were the hallmarks of the US over the last two decades and created “US exceptionalism” in both our economy and stock market performance. These very same principles are now being embraced by foreign economies, and, in our view, this may last a number of years. This creates a great backdrop for foreign stocks, particularly when we consider the extremely low valuations that exist in these markets given that they have been neglected for many years. As we review overseas stocks, we find that price-to-earnings multiples are just a fraction of what exists in the US, while earnings growth is accelerating. Lastly, since foreign markets have been neglected for so long, most institutional and retail investors are significantly underinvested in these markets. In our view, as global investors come to realize that foreign stocks are outperforming US stocks (which is the case by a wide margin in 2025), there may be a giant buying spree which could give the bull markets in these regions tremendous support in both time and upside. As opposed to the US market, where just two sectors support the markets, foreign markets exhibit broad strength across many sectors. This diversified performance suggests that these economies and markets are healthy. As you review your portfolio, you will find that we have added many foreign stocks from many different sectors, all with strong balance sheets and earnings growth prospects. As we like to say: “get your passport – there’s a bull market overseas!”
Attractive Sectors and Stocks in The New World Order
We have invested in global stocks since 1993, so we know a thing or two about this field when it comes to finding investment opportunities. In the US, as we described, the best value and earnings growth are in companies in the technology and communications sectors that are leveraging the evolution of AI. This also includes businesses helping us expand the electrical grid to accommodate the voracious demand from this technology. The financial sector is also where we find compelling valuations and growth given the deregulatory policies, particularly in banks and private equity companies. Overseas, we have much more to choose from and we are finding value across almost every sector including industrial companies, financials, technology, and material companies.
Managing the Risk of the Globally Synchronized Bull Market
Though we are bullish on many of these global themes, we must recognize that these bull markets can get derailed and result in dramatic stock market declines. Our comments about the narrowness of US markets will pose a risk at some point, as well as many other risks such as central bank policy error, US credit quality downgrade, or US administration policy error. There is also the risk of the unforeseen. For these reasons we continue to apply our time-tested Active Risk Management process, which aims to effectively mitigate losses during past bear markets and periods of catastrophic stock declines. As you know this includes flexibility with your exposure to the stock market, careful management of your sector allocations, and the use of carefully placed stop loss orders.
We hope you find this update helpful. If you have experienced any changes in your finances or have questions, please feel free to reach out to us.
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