President Donald Trump’ s “America First” policies are having the unintended consequence of making the rest of the world suddenly attractive to investors. International stocks outside the U.S. are outperforming in a way they haven’t in years, with the iShares MSCI Emerging Markets ETF (EEM) and the iShares MSCI EAFE ETF (EFA) rallying more than 7% and 11%, respectively, in 2025. On the other hand, all three U.S. major averages are down in 2025, with the Nasdaq Composite in correction territory, and the S & P 500 having briefly dipped into one as well. Meanwhile, the small-cap Russell 2000 has encroached near a bear market, defined as when there’s a fall of 20% or greater off a peak. EFA YTD mountain EFA Much of the interest in international equities has come as the recent turmoil in the U.S. stock market — with Trump’s on-again-off-again tariff policy hurting consumer and corporate sentiment — has investors doubting the U.S. exceptionalism story and seeking stronger returns elsewhere. “While U.S. stocks have performed well in recent history, investors who remain concentrated within just a single market may leave their portfolios vulnerable to country-specific risks, such as shifts in political regimes and other idiosyncratic factors,” Jeremy Folsom, investment strategy analyst at Wells Fargo Investment Institute, wrote this week. “We have encouraged investors to remain invested in developed market (DM) equities, given the attractive valuations, and emerging market (EM) equities, for potential growth,” Folsom said. “We believe that both can help to provide diversification to portfolios.” Earlier this month, Citigroup downgraded U.S. stocks to neutral from overweight because of a “pause in U.S. exceptionalism.” The firm’s strategist Dirk Willer told clients, “The news flow from the U.S. economy is likely to undershoot the [rest of the world] in coming months, and at least tactically, U.S. exceptionalism is therefore unlikely to roar back.” Elsewhere, HSBC and BCA Research also lowered their views on the U.S. market. In January, Bank of America strategist Michael Hartnett warned clients that “U.S. exceptionalism [is] peaking,” given a number of factors that include the fade in excess U.S. fiscal spending. Germany, China Of course, it’s not just that the outlook on the U.S. that has gotten more negative. Suddenly, the view on markets that investors have left for dead is showing signs of life, most notably in Germany and China. The German DAX index has rallied more than 15% this year, as Europe’s largest economy — and the third largest in the world — voted to ramp up defense and infrastructure spending as Trump signals a lack of commitment to Europe’s defense in the Ukraine war against Russia. According to NBC News, the Trump administration is considering giving up NATO command , an American responsibility that started with Dwight D. Eisenhower. The historic plan would also be significant for the European Union, with investors hopeful the spending will lift a stagnant German economy that narrowly dodged a recession through 2023 and 2024, and also benefit the broader continent. The STOXX Europe 600 has also advanced roughly 9% this year, buoyed by the rally in Germany stocks. “I think it’ll have kind of a trickle-down effect on the rest of the economy, and then different sectors as well. It will affect consumers, I think, down the line as well, just given how much pressure they’ve been over the past couple years,” said Trevor Yates, senior investment analyst at Global X. “That’s why we when we talk to investors, we really advocate for the ETF kind of group approach … because the whole economy should see these benefits.” To be sure, some market observers expect there could be a better entry point for international stocks after their recent outperformance. “We do think that international markets have the potential to do better than the U.S. for much of this year,” said Katie Stockton, founder of Fairlead Strategies. “That doesn’t mean they’re buys right here and now, but perhaps somewhere, people might want to build some relative exposure into the next downdraft and develop global Europe versus US.” China is also outperforming, as attractive valuations, and the rise of DeepSeek, revived investor interest in the stock market. The iShares MSCI China ETF (MCHI) has surged about 21% this year, while the iShares China Large-Cap ETF (FXI) has rallied more than 22%. Beijing’s decision to raise its defense spending by 7.2% this year, in order to “firmly safeguard” its national security, is also notable. On top of this, the possibility that Trump’s tariffs could be more substantial than a negotiating tool for the administration has investors wary that there are significant changes underway in global relations, and the rally in international markets could be sustainable. “Three months ago, investors were convinced that Trump 2.0 would make a bad situation in Europe and China even worse,” Dario Perkins, managing director of global macro at TS Lombard, wrote this week in a note titled “Is the U.S. now uninvestable.” “Instead, Trump has become a catalyst for big policy changes,” he added, noting that Germany and China have already announced a sizable response and other governments are likely to follow. “It is still early days, and there may be setbacks, but these policy shifts could mark the start of a major realignment in international trade and a genuine rebalancing of global demand,” Perkins said. Of course, however, a severe deterioration in the U.S. economy would have global repercussions. He said: “Make no mistake – a US recession would bring down the entire world.”
