U.S. stocks have lagged their European peers this year, amid fading megacap tech gains, tariff uncertainty and renewed inflation risks, but many on Wall Street see a comeback for American markets over the coming months.
Europe’s Stoxx 600 benchmark, which hit a record high last week, has risen more than 8.8% so far this and is up more than 9.1% since President Donald Trump was elected to a second term in November.
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Both gains have outpaced the S&P 500, which is up just 2% for the year, as well as the Nasdaq, which is effectively unchanged from its close on New Year’s Eve.
Bank of America, in fact, noted that this month the weekly inflows into European stocks were the strongest in at least three years, following on from the best January allocation since the start of the new century.
Curiously, the European gains have come amid an unimpressive fourth-quarter-earnings season — Stoxx 600 profits are estimated to have risen only 3% from the year-earlier period, to around €127.9 billion ($134.4 billion) — and tepid economic growth, with Germany just barely escaping recession and the broader region growing by a meager 0.1%.
By contrast, estimates say S&P 500 earnings rose 15.7% in Q4 to a collective tally of $540 billion, against a GDP growth rate of around 2.3% that has carried over into the first two months of the year.
Nvidia earnings will need to be a key market catalyst if U.S. stocks are to close the gap on their European peers this year.
Lisa Shalett, chief investment officer and head of the global investment office at Morgan Stanley Wealth Management, says the European gains could reflect the possibility of an end to Russia’s war on Ukraine and the likelihood that increased government spending and the ongoing recovery in China will feed into growth prospects.
But she doesn’t see the gains as sustainable, noting that the White House recent threat to impose reciprocal tariffs on European exports, as well as the shifting allegiances in President Donald Trump’s new foreign policy, could harm the region’s recovery.
U.S. market leadership will return: BlackRock
BlackRock’s Jean Boivin, who heads the asset manager’s Investment Institute, is no longer underweight European stocks, but he still sees the U.S. market outperforming over the near term.
“We still expect the U.S. to reclaim leadership this year and stay overweight U.S. stocks as corporate-earnings strength and the artificial intelligence theme broaden out,” Boivin and his team wrote.
“We expect megacap tech and other AI-linked stocks to keep driving U.S. equity returns, especially as AI adoption grows, but we also see signs of earnings strength broadening beyond tech,” he added.
Related: Retail sales tumble in January, testing Fed rate cut forecast
Boivin noted that LSEG forecasts suggest tech stocks will deliver around 18% of earnings growth this year, compared with around 11% for the broader S&P 500. That’s a narrower gap than it was in 2024, which could indicate a more predictable, less volatile performance for the index this year.
Tech is still the market’s key sentiment barometer, however, which along with tariff risks and renewed inflation concerns will be in play this week.
Nvidia earnings on deck
Nvidia (NVDA) will report its fiscal-fourth-quarter results after trading closes on Wednesday, and investors are keen to hear the AI-chip maker’s forecast for demand in the wake of China-based DeepSeek’s emergence last month.
Trump will also likely confirm new levies on goods imported from Canada and Mexico, which he had delayed earlier this month. And the Bureau of Economic Analysis will publish the Fed’s preferred inflation gauge to close out the week.
“Friday’s PCE for January will be extra important for markets because it will help to confirm if inflation did indeed spike at the start of 2025,” said Clark Bellin, president and chief investment officer at Bellwether Wealth in Lincoln, Neb.
Related: Top analyst revisits Nvidia stock price target amid DeepSeek questions
“Regardless of what Friday’s PCE says, it’s likely that the Federal Reserve remains on hold when it comes to any interest rate decision for at least the next six months,” he added.
That likely neutralizes one of the market’s key bullish themes — the prospect that the Federal Reserve will ease interest rates — but Shalett at Morgan Stanley says that narrative is already starting to change.
“US equities have been fairly resilient at the index level, exhibiting greater breadth and new sector leadership, with the dominant bullish narrative shifting to the benefits of
Washington policy under a new administration and double-digit profit-growth projections for this year and next,” she said.
Uncertainty is the bull market’s enemy: Siebert’s Malek
Mark Malek, chief investment officer at Siebert Financial, has a different view on the impact that Trump policies are having on markets and sentiment.
“Uncertainty is a bull market’s worst nemesis, and to say that there is a lot of uncertainty out there right now would be a massive understatement,” he said, citing the market’s reaction to better-than-expected earnings and a conservative outlook from retail giant Walmart (WMT) last week.
“When a company like Walmart comes out with a rather solid earnings and sales beat but provides future guidance that is on the lighter side, it gets punished severely with a two-day loss of around -9%, Malek said. “Expectations are high and when hopes are dashed, uncertainty takes over.”
Which, of course, puts Nvidia’s Wednesday report squarely in the market’s crosshairs.
More Economic Analysis:
Retail sales tumble in January, testing Fed rate cut forecastCPI inflation shock hammers Fed rate cut bets for 2025Rate cuts and tariffs will weigh on economic reports
“With market jitters abounding for macro, Trump policy worries, Fed/inflation, DeepSeek, and myriad other issues, the most important company for the tech sector and AI Revolution continues to be Nvidia,” said Wedbush analyst Dan Ives.
“The bedrock of this bull market in 2025 is built around the AI Revolution spreading to the 2nd/3rd derivatives across software, consumer tech, and infrastructure … but it all starts with Nvidia and all the market will be very closely watching the fireworks on Wednesday night.”
Related: Veteran fund manager unveils eye-popping S&P 500 forecast
