Over the past two years, fueled by a "fear of missing out" mentality, bets on Federal Reserve interest rate cuts, and a surge in artificial intelligence excitement, U.S. stocks consistently outperformed global marketsHowever, this trend has reversed in 2023, with European and Asia-Pacific equity markets witnessing greater growth than their American counterparts.

Analysts increasingly see value and potential in European and Asian stock marketsThe S&P 500 index, after a staggering 53% increase over the last two years, has only risen 0.3% since January 20 this yearIn contrast, several major U.S. tech stocks, including Nvidia, have underperformed relative to the S&P 500, contributing less to the index than in previous yearsNotably, in the past month, while the S&P 500 declined by 0.6%, consumer staples and healthcare sectors surged by 6.8% and 2.6%, respectively, highlighting a significant shift in market dynamics.

Recent economic data raised concerns about the U.S. economy's slower-than-expected growth and persistent inflation, leading to a further decline in U.S. stocks, with a weekly drop of about 1.7%. The Nasdaq Composite and Dow Jones indices fell approximately 2% and almost 3%, respectivelyStrategist Renae Harnett of Bank of America pointed out that the outperformance of defensive consumer staples and healthcare sectors serves as a warning sign regarding the U.S. economy's healthThe rise of defensive stocks often signals a slowdown in economic activity, which could disrupt the ongoing bull market in U.S. equities.

Furthermore, Greg Hacket, Chief Market Strategist at Nationwide Investment Management, noted that stocks outside the U.S. missed much of the previous two years' gainsWith the global economic outlook stabilizing, these foreign stocks are now appearing relatively cheapAdditionally, uncertainties surrounding U.S. tariffs have resulted in a dampened market sentiment, compounded by a decline in the strength of the U.S. dollar.

"This shift could be a long-term change rather than a cyclical phenomenon

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The last time the performance gap between U.S. and European stocks was this pronounced was during the tech bubbleSuch shifts, when they occur, tend to happen rapidly and last a considerable time,” he stated.

Mark Kogan, CIO of Hirtle Callaghan, echoed this sentiment, asserting that the extreme sentiment and positioning in U.S. equities suggest that once a reversal begins, it could be sustained for a significant duration.

Upcoming major events that could influence American stocks include Nvidia's earnings report for the fourth quarter being released post-market on Wednesday, a revised annualized quarter-on-quarter GDP figure for the last quarter of the previous year, and personal consumption expenditure data for January, set to be published on Friday.

Wall Street analysts anticipate Nvidia's Q4 revenue to rise by 73% to $38.26 billion, with adjusted earnings per share likely increasing by 63% to $0.84. Key focal points in the earnings report will include whether the AI data center segment can maintain its growth trajectory, any potential technical delays in the mass production of the Blackwell GB200 architecture, the market's transition rhythm regarding GPU products, and the management's perspective on the global commercialization of AI applicationsAdditionally, investors will pay close attention to CEO Jensen Huang’s insights regarding the demand for AI chips, especially after the introduction of the DeepSeek-R1 model, which has rekindled enthusiasm for AI computing capabilities.

The PCE index, a critical inflation gauge for the Federal Reserve, is expected to show a 2.6% year-over-year increase in core PCE for January, slightly down from 2.7%. Economists project a month-on-month increase of 0.3% in the overall PCE index for January, up from 0.2%. Due to persistent inflation exceeding the Fed’s target and a robust labor market, consensus estimates suggest that interest rates are unlikely to decrease until mid-2025.

Weston, a research head at Australia's Rockstone Financial Group, suggested that markets might react strongly to any economic data this week, particularly in light of growing concerns regarding the U.S. economy, leading to potentially negative interpretations.

Concerns about tariffs and their potential to spur inflation continue to loom over U.S. equities

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Citigroup's U.S. equity strategist Andrew Santon highlighted that as valuations of U.S. stocks approach historical highs, the market could experience increased volatility in 2025 as investors grapple with the impact of U.S. policy changes.

While American stocks have seen a dip, sentiment has shifted towards European and Asian marketsDuring the previous two years of U.S. stock market gains, the European Stoxx 600 index climbed 20%, while the Nasdaq Golden Dragon Index barely moved, rising only 1%. However, since January 20, the Stoxx 600 has gained 5.8%, significantly outpacing the Nasdaq Golden Dragon index, which soared 18%. After the recent rally, both indices currently exhibit average price-to-earnings ratios of 14x and 17x, well below the S&P 500's 22x ratio.

Citi Group has noted a significant shift in investment positioning, indicating that investors are now more bullish on Europe than on the U.SHe noted that there is a growing interest in the German market, reflecting a transfer of that previously aggressive "fear of missing out" mentality towards European equitiesIn recent weeks, implied volatility in the German DAX and the European Stoxx 50 has risen dramatically, which is an unusual occurrence for broad European equity indices.

Underlying this enthusiasm are strong fundamentals, including lagging valuations in European markets, a more favorable interest rate outlook, robust corporate earnings, and optimistic sentiments surrounding a potential resolution to the Ukraine crisis.

UBS's wealth management division recently reported that the Euro Stoxx 600 index reached a record high after European leaders proposed strengthening their defense during an emergency meeting held in ParisHowever, uncertainties related to geopolitical risks still cloud the region's growth prospects, and U.S. tariffs will significantly impact the global landscape.

Against this backdrop, UBS recommends focusing on European small-cap stocks and high-dividend blue-chip companies from Switzerland. "Potential new tariffs might pressure European companies, especially in cyclical sectors like consumer discretionary and industrials," it stated

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However, a decline in interest rates and reasonable valuations may support the economic recovery in the regionEurozone small-caps, in particular, are expected to benefit more than large counterparts from lower rates, improved lending conditions, and healthier domestic growth, alongside exposure to structural trends such as energy generation, decarbonization, and automation.

The Asia-Pacific stock markets are also experiencing a swell in investor sentiment, notably concerning Chinese tech stocksUBS highlighted in its report that Asia is set to offer numerous growth opportunities this year, with Chinese tech stocks expected to outperform the broader marketSince mid-January, Chinese tech stocks have surged over 25% due to the resurgence of investor optimism surrounding Chinese AI innovations, significantly driven by the advent of DeepSeekRecent discussions surrounding private enterprises have reinforced the government's acknowledgment of the tech and private sectors' roles in driving national economic growth.

While UBS maintains a neutral stance on Chinese stocks, it believes internet companies are likely to outperform the MSCI China Index, buoyed by improved fundamentals, encouraging shareholder returns, and persistent macroeconomic supportOverall, Asia, except for Japan, is forecasted to experience a 13% profit growth this year, driven by vigorous AI expenditure, rapid GDP growth, and a decline in rates in both the U.S. and the region.

The Chinese stock market has continued to rise this year, extending a robust performance that began in late 2024, largely driven by advancements in DeepSeek AI, which has excited the marketThe benefits brought about by DeepSeek, including enhanced efficiency and reduced costs, coupled with improved computing capabilities, lower barriers to entry for AI technology, stand to benefit numerous Chinese firms, potentially propelling a reevaluation of their stocksChinese enterprises are also moving upstream in the value chain, with some sectors offering highly competitive products. "The valuation of Chinese stocks has been attractive for years, and these significant catalysts have altered that situation

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