Will America’s stockmarket convulsions spread?
It seems like five minutes ago that America’s stockmarket was the only game in town. Prices were breaking records every other week; rivals around the world had been left behind. Now investors’ faith in the country’s exceptionalism has been shaken by a deteriorating outlook for economic growth and Donald Trump’s erratic protectionism (see chart 1). On March 11th the president said that he would double new tariffs on Canadian aluminium and steel. Investors are therefore less willing to pay far higher multiples of underlying earnings for shares in American firms than for those listed elsewhere, a decision that had been justified by fatter profit margins and stronger growth prospects.
What is more, investors’ customary boltholes look less appealing than usual. The dollar has weakened along with shares. Gold has spent the past two years on a rally for the ages, raising the possibility of its own correction (see chart 2). Worries about persistent inflation have prevented yields on American Treasury bonds from falling as much as they might during a growth scare (meaning prices, which move inversely to yields, have not risen much). Meanwhile, German and Japanese sovereign bonds—two other erstwhile ports in a storm—have failed to offer safety. Their yields have soared, and so prices have fallen (see chart 3).
Instead, it is stockmarkets outside America to which investors have been dashing. So far this year Europe’s Stoxx 600 index has risen by 12% in dollar terms, and Germany’s DAX by 19%. The Hang Seng, which includes many Chinese firms listed in Hong Kong, is also up by 19%.
Those stocks, too, are risky assets. It is just that they now look more attractive than American ones. The price of America’s S&P 500 is 21 times higher than the earnings expected by its constituents over the coming year. The equivalent multiple for Europe’s Stoxx 600 is 15; that for the Hang Seng is 11. As a result, even if share prices in Europe and Hong Kong also start to plunge, they would have less room to fall, since any company that stays profitable is likely to remain worth at least a few years’ earnings.
Investors, of course, are hoping not just for a greater margin of safety, but for the stellar Chinese and European returns of recent weeks to continue. The odds on this are longer. Chinese stocks were a serial disappointment, weighed down by a stagnating economy and fears of deflation, before their current streak. These fears returned on March 9th, as data showed consumer prices fell in the year to February, even if the numbers in part reflected the changing date of the lunar new year.
More worrying, Chinese shares’ present boom owes much to euphoria over artificial intelligence, which has swept the market since models developed by DeepSeek, a startup, grabbed the world’s attention in January. The Hang Seng Tech index, which includes some of China’s biggest tech firms, has rocketed by more than 40%, with investors ploughing money into AI-linked stocks as fast as possible. The exuberance recalls a mania for American AI firms last year. Many have since seen their share prices fall sharply.
On the face of it, the bull case for European stocks looks better. The old continent’s economic prospects have waxed as those of America have waned. On March 10th Goldman Sachs cut its forecast for American growth in 2025 by 0.7 percentage points, to 1.7%. A week earlier, just after Germany announced a groundbreaking fiscal-stimulus package, the bank’s analysts upgraded their growth forecasts for the country.
Yet Europe faces its own challenges, not least the task of paying far more either to fight the war in Ukraine or maintain a future peace there, as America draws back. Any increased government spending that goes towards this will surely be good for Europe’s armsmakers, whose share prices investors have sent into the stratosphere. These firms, though, account for a small proportion of the continent’s stockmarket value. The Stoxx 600’s aerospace and defence sub-index has a market capitalisation of just €600bn ($650bn), compared with the total index’s €14trn.
Europe’s biggest firms, meanwhile, rely just as much as America’s giants on the global trading system that Donald Trump is threatening to tear apart. They include ASML, a chipmaker; LVMH, a luxury-goods conglomerate; and several pharmaceuticals giants. All would suffer from a trade war that gums up supply chains and impedes global commerce. If investors’ fears about American growth are realised, they would harm stock prices around the world—even before accounting for the spillover effects of a slowdown in its largest economy. Investors seeking protection in shares with lower valuations are probably wise to do so. That does not mean they will be rewarded with barnstorming returns. ■