[Reuters Analysis] 'America First' brightens European outlook: McGeever

By Jamie McGeever

ORLANDO, Florida, March 4 (Reuters) - The divergence between U.S. and European stocks this year was epitomized by the perfect symmetry in their opposing fortunes on Monday: Germany's DAX surged 2.64%, while America's Nasdaq slumped 2.64%.

This stark deviation really started taking root in January – not coincidentally, right around U.S. President Donald Trump's inauguration. A rebound in battered European assets just needed a trigger, and ironically, the chaotic implementation of Trump's "America First" agenda appears to have provided it.

Investors initially cheered Trump's election platform of tariffs, deregulation, tax cuts, reduced federal spending, and disdain toward multilateral institutions.

Big Tech lifted Wall Street to new peaks in early 2025, and the dollar and Treasury yields kept rising. But as the potential for a fully-fledged trade war rose, sentiment started to shift dramatically.

Meanwhile, Europe's security vulnerabilities were starkly exposed, as Washington's stance on the Ukraine-Russia war tilted toward Moscow. Vice President JD Vance's Munich speech and Trump's public slapping down of Ukrainian President Volodymyr Zelenskiy have appeared to shred U.S.-European relations, raising existential doubts over NATO.

None of that sounds particularly positive for Europe. But the past six weeks have kicked the continent into coordinated action that could see Germany create a 500 billion euro ($529.90 billion) infrastructure fund and the European Union mobilize close to 1 trillion euros for defense, security and infrastructure.

That's the level of growth-boosting spending that many analysts have been urging Europe to pursue for decades. If it materializes, it would be a game-changer.

TABLES HAVE TURNED

So the 'U.S. exceptionalism' narrative is fading and being replaced by the European recovery story.

"When you get a meaningful correction in risk assets from U.S. policy instability, that naturally translates into the relative outperformance of unloved assets," like Europe, notes Benn Eifert, managing partner at San Francisco-based hedge fund QVR Advisors. "There's much, much more room to go."

It won't be a linear move. Europe's growth is fragile, the region is likely to come under Trump's tariff line of fire soon, and Germany's Dax recoiled 3.5% on Tuesday - its steepest fall in exactly four years - as trade war fears rattled global markets.

But the bullish U.S./bearish Europe dance that markets have seen over the last few years looks to be over. Allocations to the U.S., the 'American exceptionalism' narrative, and Wall Street valuations simply became too extreme. Unloved, under-owned Europe was the negative mirror image.

So the tables are turning now.

The gap between Citi's euro zone and U.S. economic surprises index is close to the widest and most euro-positive in two years. And the gap between year-ahead annual growth forecasts for the U.S. and EU, which was a full percentage point recently, according to Morgan Stanley economists looks set to shrink.

Capital is flowing accordingly. After years of near-consistent outflows, European equity funds are drawing in the biggest inflows since 2022, Bank of America figures show, while the record inflows into U.S. equity of last year are drying up.

These are historic times. America's security backstop for Europe and commitment to free trade are no longer givens. And we could be about to see the biggest shift in global trade relations since the collapse of Bretton Woods, and most dramatic shift in German fiscal policy since re-unification.

No one knows how things will play out, but right now Europe looks to be benefiting from this 'America first' administration more than many would have thought. Maybe even more than the U.S.

(The opinions expressed here are those of the author, a columnist for Reuters.)

($1 = 0.9436 euros)

U.S.-European stock valuation gap historically wide

U.S. vs European stocks since President Trump's inauguration

European equity funds attract strong inflows ... finally