Crypto News: US exceptionalism is now over. European stocks stand to gain

American exceptionalism is probably dead. I'm not talking about the US entrepreneurial model that has fueled Silicon Valley and spawned the tech giants that dominate US markets. No, I'm talking about that model's ability to consistently deliver higher earnings growth to fuel US market outperformance.

Going forward, as the US retrenches that growth will move to Europe, benefitting European equities after seven long years of underperformance. This is the first big asset-allocation shift apparent as the market searches for new leadership.

American market exceptionalism didn't start soon after the Great Recession despite Europe's sovereign debt problems. It really began in 2018.
European markets have been outperforming this year, particularly after the US economic policy began to take shape.
The reason is clear: Europe must now spend more on defense and infrastructure while the US is constrained by already high deficits.
We should expect this outperformance to last as it takes time for markets to fully believe in paradigm shifts.
The turn of events will only hasten the deflation of the recent US equity super bubble.

You can see the US outperformance beginning about seven years ago

I've seen a lot of charts comparing the US to Europe by trying to normalize the equity index compositions. Europe has more heavy industrial and less technology for one. And so, a lot of this involves stripping out the technology sector or just the so-called Magnificent Seven US tech giants in order to get a sense of whether the US trades at a significant premium. I remember interviewing German asset manager Phillipp Vorndran several years ago about this, with him remarking that there really wasn't a premium to US shares when you did this. The US just had better growth.

But that conversation was in 2019. A year prior, beginning in 2018 the US had started to go on a massive outperformance wave. And now the two markets are not the same at all.

Looking at consumer stocks for a second, the more pedestrian growers like Carrefour trading at less than 12 times earnings are on par with US counterparts like Target or Campbell's. But the higher flyers in Europe — like LVMH at 24 times and Nestle at 21 times — are a lot lower than Walmart at 34 times earnings. If a company is considered a growth stock, in the US it gets a considerable premium. And with US markets led by high growth Mag7 tech companies, that has been reflected in US outperformance, much of it coming from earnings multiple expansion.

So, yes, the US isn't a premium to Europe everywhere. But it is where it counts, at the heart of the market, among the largest stocks that dominate their respective markets. Paying a premium for growth makes some sense in a world where US growth is higher and it accounts for so-called US exceptionalism.

That narrative has been upended this year

Even before the Trump Administration came into being, we saw that narrative starting to change. Looking at the S&P 500 versus Germany's DAX again, we see outperformance right from the inauguration as the S&P 500's advance stalled in anticipation of clarity around policy. Then the bottom fell out of US stocks in mid-February as the anti-growth nature of Trump's first policy salvos became clear. The DAX has continued to power forward.

What's happening is a step-wise appreciation that Trump represents a paradigm shift for the US. He even says so himself, suggesting that the US requires a period of transition as we move to a new economic model. Here's how I put the administration's messaging in a post for Bloomberg terminal clients last Friday:

Their comments point to a Chicago school of economics-styled overhaul of the US economy, which will include a large growth hiccup that keeps 10-year yields low, but hurts equities.
...
Bessent appears to be laying the groundwork for a wholesale economic overhaul away from what he sees as an excessively government-led economic model to one led by private investment and competition. That will include a wrenching adjustment period.
That's good news for bond investors, but bad news for stock investors because it suggests a calibrated risk strategy to get the "bad stuff" out of the way first via tariffs and government spending cuts before any deregulation or tax cuts kick in. While Trump, Bessent and DOGE champion Elon Musk risk a severe growth slowdown or even recession through this strategy, if they can pull it off with growth reviving well ahead of the midterms in 2026, the gambit will have paid off economically and electorally.

Make what you will of the logic behind this paradigm shift, it definitely means slower growth in the medium term. And even President Trump has acknowledged this publicly. I think that growth underperformance lasts for quite a while though. And therefore, it will keep the European outperformance going.

By the numbers

16%

- The outperformance of the DAX over the S&P 500 in 2025 through March 11

Deficits are the dirty secret here

This retrenchment by Trump points to the big difference for the US — deficits. The US budget deficits are so much bigger than Germany's that it adds an extra two or three percentage points of spending power to the US private sector relative to the German one, sometimes more.

That was especially true during the pandemic, when the US went the extra mile to ensure that US households were flush with cash.

Bloomberg data doesn't show the latest German figures but they are below 3% deficits. Trading economics shows the full year 2024 as coming in at 2.8%, just inside the Maastricht 3% deficit hurdle. So that 2% or 3% gap is probably more like 4% right now. Obviously Germany has made up the shortfall in domestic demand by exporting. But that doesn't make up for the domestic demand differentials from deficits. And so, German growth has been weak.

This is going to change, principally because the message from the Trump administration to Europe has been that 'you're on your own'. Without the US defense umbrella and with the US starting a trade war via aluminum and steel tariffs, the Europeans have recognized an urgent need to reduce dependence on the US all around. In Germany, the incoming Chancellor Friedrich Merz is even trying to change the constitution to allow more debt in the lame duck session of the Bundestag, Germany's lower house of parliament, so as to avoid needing help from the AfD party, which has pro-Russian sympathies and may block the changes as a result.

This isn't fully priced in

Just as the anti-growth aspects of Trump's agenda took a while to come into focus, this pro-growth EU agenda will also take a while to become fully apparent. And so, markets are far from having priced it in. The proof is in the legislation to increase defense and infrastructure spending and in the economic growth and earnings numbers to come.

The first big hurdle is in Germany this week, where the Green Party has been stalling the constitutional changes because it has specific environmental wants on the infrastructure side of the ledger. They will be out of power in the coming coalition government and want to assure their agenda items get ticked off while they still have some sway. But once Germany allows for more debt, everywhere in the EU we are going to see more government spending as the Germans have been the enforcers of debt and deficit rules in the EU, as we saw during the European sovereign debt crisis.

I would expect another lift in European equities on the constitutional change and yet more upside to European stocks once the money is actually spent and reflected in growth and earnings.

What about the super bubble?

Meanwhile, I've decided to track the super bubble on a week-to-week basis. I want to add a blurb on it, even if short, every week to track how inexorably I think the gravitational pull of returns is likely to be as US exceptionalism fades from view.

As a reminder, the thesis here is that bull markets in stocks cause long-term US equity market returns to move in long waves toward extreme overvaluation. These tops are self-correcting but eventually lead to extreme undervaluation. We're about six years into a down wave that I believe is most similar to the one that followed the 1959 market top. Here's the chart again, just for reference.

If March ends with the S&P at yesterday's closing level, we would have just about a 100% return on stocks in the last 10 years in excess of inflation. That's about half of where we were six years ago, and even 3 ½ years ago during the pandemic trading bubble. It puts us to around the levels prevailing in 2018 when US exceptionalism began in earnest. If I am right that US exceptionalism is indeed over, expect those numbers to shrink further still in the coming years, with any downturn accelerating that decline.