Mar 26, 2025 | 7 min read
Top Line Summary
Global investors are pulling back from US equities at record pace, with 69% of fund managers saying “US exceptionalism” has peaked — triggering a rotation toward Europe and emerging markets.
Europe is breaking from decades of austerity, with Germany leading a €1 trillion investment wave that is supercharging defense, infrastructure, and industrials — and the European Commission following with a €650 billion defense initiative.
China is drawing capital again, as stimulus kicks in, tech innovation accelerates (hello, BYD and DeepSeek), and money flows into markets via Hong Kong’s Stock Connect — challenging old narratives of uninvestability.
The End of American Exceptionalism?
For much of the past 15 years, investing globally felt like a losing bet. You could own Europe, Japan, emerging markets — or you could just own the US and beat them all. American tech giants led the charge. The dollar dominated. The US economy, post-2008, consistently outperformed its peers. In strategy memos and investment committees, one phrase summed up the thinking: American exceptionalism.
But in early 2025, something started to shift — and fast.
In March, Bank of America’s Fund Manager Survey reported the largest drop in US equity allocations on record. At the same time, allocations to Eurozone stocks jumped to their highest level since 2021. And perhaps most striking of all: 69% of global fund managers now believe US exceptionalism has peaked
Exhibit 1: Record rotation out of US stocks
Source: Bank of America Global Fund Manager (FMS) survey
Exhibit 2: 69% of FMS investors say 'US exceptionalism' has peaked
Source: Bank of America Global Fund Manager (FMS) survey
For the first time in a long time, the question on everyone’s mind isn’t “how much US should I own?” It’s “what else is out there?”
A Turning Tide
This isn’t just about profit-taking from Big Tech. The shift feels more fundamental. Investors are rethinking where growth, value, and policy support are likely to come from in the years ahead. In portfolios, in strategy calls, in client conversations — there's a growing sense that we’re entering a new regime.
So what’s driving the turn? Why now?
Let’s start in Washington.
Trump 2.0: When the Risks Show Up First
Markets initially cheered Trump’s return to office, hoping for a familiar blend of tax cuts, deregulation, and infrastructure spending. But so far, the second Trump administration has delivered something else entirely: a wave of trade friction, geopolitical realignment, and economic uncertainty.
Tariffs are back in full force — not just against China, but Canada and Mexico too. A 25% levy on Canadian steel and aluminum. A 10% blanket tariff on all critical imports. A chilling message to allies and adversaries alike: the US is reasserting itself on new terms.
The economic impact has been swift. Consumer confidence has taken a hit, reaching its lowest level since January 2021, as trade tensions and tariff uncertainties weigh on sentiment. ISM manufacturing data is rolling over, with new orders contracting and prices paid spiking — a classic stagflationary signal.
Exhibit 3: US Consumer Confidence Index
Source: The Conference Board; NBER
The result? Investors are growing uneasy. Especially with how US equities had been priced: for perfection.
Europe Awakens
While the US leans inward, Europe is spending. And not just a little.
In a historic break from decades of fiscal conservatism, Germany is rolling out a €1 trillion investment plan, including massive infrastructure upgrades and a rearmament push not seen since reunification. This pivot has transformed the narrative around German equities. Once market laggards, German industrials are now leading the charge.
Exhibit 4: Historical comparison of Germany's major fiscal plans
Source: TS Lombard
The DAX index has surged past the S&P 500 in 2025. Defense contractors like Rheinmetall and Airbus are hitting all-time highs. Even more traditional cyclicals — construction, autos, energy — are being re-rated as investors position for Europe’s comeback story.
Exhibit 5: Euro Stoxx 600 relative to S&P 500 performance
Source: Bloomberg
Exhibit 6: Magnificent 7 relative to DAX Index performance
Source: Bloomberg
This isn’t happening in isolation. From Brussels to Paris to Rome, governments are preparing to follow Germany’s lead. The European Commission proposed a €650 billion defense spending expansion. For the first time in years, there’s real fiscal momentum in the EU.
Meanwhile in China…
China isn’t standing still either.
After years of investor apathy, Chinese markets are quietly rebounding. MSCI China is up over 16% year-to-date, outpacing the S&P 500 and even European benchmarks. Tech giants like Tencent and Alibaba are recovering. EV champion BYD shocked the world with a battery that charges in five minutes — a shot across Tesla’s bow. AI startups like DeepSeek are pushing into territory once seen as a Western stronghold.
Exhibit 7: Tesla vs. BYD performance
Source: Bloomberg
And while headlines still focus on tariffs and geopolitics, there’s a quieter shift happening: money is flowing back into China. Hong Kong’s southbound Stock Connect saw its biggest monthly inflows since 2021 in February. China’s fiscal stimulus — including ¥1.3 trillion in ultra-long bonds — is finally feeding through to the real economy.
For global investors, especially those willing to look beyond the fear narrative, China is starting to look investable again.
Why the Global Rebalance?
At the heart of this rotation is a realization that the “US vs the world” framing no longer reflects reality.
1. The US was priced for perfection.
Valuations on US megacaps — especially the so-called Magnificent 7 — stretched well beyond their historical norms. The smallest stumble in earnings or policy clarity could trigger a reassessment. That moment appears to be underway.
2. The rest of the world was overly discounted.
Europe and China faced serious post-COVID headwinds. But many of those problems were cyclical — not structural. Now that fiscal stimulus and industrial policy are returning, the upside surprise is real.
3. The global reaction to Trump 2.0 has been underestimated.
Instead of retreating in the face of US tariffs and isolation, other powers are responding with bold, coordinated action. Germany is rewriting its fiscal constitution. China is attracting fresh capital. And markets are noticing.
A New Era for Capital Flows?
This raises a bigger question: are we just witnessing a short-term rotation — or a generational realignment in global capital flows?
It’s too early to say for sure. But history suggests that when markets start to reprice geopolitics, policy, and economic leadership all at once, the effects can be sticky. Analysts like Russell Napier have pointed to the rise of credit-allocation economies — where governments, not markets, increasingly direct capital. In his view, we may be entering an era as significant as the post-Bretton Woods shift in the early 1970s.
Back then, it was the end of Bretton Woods, the rise of oil shocks, and the birth of emerging markets. Today, we may be seeing the end of a different kind of unipolar world — one where capital flowed to the US by default. That world is changing.
The Bottom Line
The idea of US exceptionalism is being seriously questioned — not just by commentators, but by capital.
A record shift in fund manager allocations shows a growing belief that the US is no longer the automatic engine of global returns. In contrast, Europe is embracing fiscal expansion at historic scale, and China is re-emerging as a viable — even competitive — market destination.
What we’re seeing may be more than a short-term rotation. With rising trade friction, policy divergence, and geopolitical realignment, global capital flows are beginning to reflect a new economic order — one less centered on the US and more defined by multipolar momentum.
What Should Investors Do?
At Israilov Financial, we don’t believe in swinging wildly with market narratives. But we do believe in listening closely when the story starts to change.
If your portfolio is still anchored to the old playbook — overweight US tech, underweight the rest — it might be time for a review. That doesn’t mean dumping US equities. But it does mean asking tough questions about concentration risk, currency exposure, and where future returns are likely to come from.
The world is getting more complex, more competitive, and — we think — more interesting.
It’s no longer just about finding the best company in the US.
It’s about understanding how global narratives shape local opportunities.
And that’s where we come in.
Curious how these trends might affect your investments?
Let’s talk. Book a free intro call with us.
IMPORTANT DISCLAIMERS
Past performance is no guarantee of future returns
The graphs and charts in this commentary are for illustrative purposes only and not indicative of any actual investment. Index returns do not reflect any fees, expenses, or sales charges. It is not possible to invest directly in an index. Stocks are not guaranteed and have been more volatile than other asset classes. Historical returns were the result of certain market factors and events which may not be repeated in the future. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgement in determining whether investments are appropriate for clients.
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