President Donald Trump's policies are supposed to usher in a new "golden age" for America, but so far, at least measured by the S&P 500, they seem to be doing more for the rest of the world. While the S&P 500 is now about flat since Election Day, major stock indexes in China and Europe are on the upswing, partly due to the Trump effect.
After a period of economic angst, both Europe and China have taken the bull by the horns over the past week, committing to boost spending as they brace for fallout from Trump tariffs. Trump's decision to stop backing Ukraine's military effort vs. Russia also just gave Europe a second reason to run wider fiscal deficits.
Hang Seng Gets Lift From Alibaba, Fiscal Policy
The Hong Kong-based Hang Seng Index rallied 3.3% on Thursday, bringing its year-to-date gain to 24.2%. The Hang Seng has recovered to levels last seen in February 2022. This week's strength has been fueled by Beijing sticking by its 5% GDP growth target, despite the depressing impact of Trump tariffs.
China's government announced it would run a fiscal deficit of 4% of GDP, the highest in decades. Meanwhile, Chinese stocks have been powered by their own Terrific 10 challengers to the S&P 500's Magnificent Seven stocks. Alibaba, among those 10 stalwarts, has climbed 5.8% this week amid the release of its latest AI reasoning model that supposedly matches DeepSeek.
European Stocks Charge, Led By Defense
Germany's DAX has climbed 3.4% this week, while France's CAC 40 is up 2.8%, thanks to a fiscal boost in response to Trump.
Germany may set aside funds equal to 20% of GDP for defense and infrastructure in what Deutsche Bank's Robin Winkler called "a fiscal regime shift of historic proportions."
Meanwhile, European Commission President Ursula von der Leyen called for an $865 billion defense spending package over four years to ensure a "safe and resilient Europe."
London-based BAE Systems, Europe's largest defense contractor, has surged 20.7% this week to a record high. Lockheed Martin, by comparison, is up 0.9% on the week, but in a steep downtrend and 27% below its October 2024 record high.
Trump Agenda: 'A Little Disturbance,' Then Tax Cuts
It's way too early to draw conclusions about how Trump's economic policies will play out. It probably isn't helping the S&P 500 that Trump is leading off with the harsh medicine of tariffs and spending cuts led by the Department of Government Efficiency (DOGE). Tax cuts are still at least a couple of months away. In his first term, tax cuts came first.
In his address to Congress on Tuesday night, Trump said that tariffs will make "America rich again" rather quickly, but not before "a little disturbance." Americans should be "OK with that."
Separately, the AI stock boom that underpinned the U.S. market advance in recent years is sputtering. That's in part due to concerns that AI models from DeepSeek, Alibaba and others will require significantly less AI hardware spending than expected. That's hitting Nvidia and other AI chipmakers, but also a wide range of AI-adjacent sectors .
Fiscal Policy Helped Fuel S&P 500
Visual Capitalist, in a Feb. 27 analysis, noted 13.8% annualized returns for the S&P 500 over the past decade. Meanwhile, global stocks in the MSCI All World ex USA Index rose an annualized 4.9%.
The story has changed this year, though. The S&P 500 is down 1.4% year-to-date intraday Thursday, tumbling since its Feb. 19 all-time high. Meanwhile, the MSCI All World ex USA is up 8.4%.
In November, Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, credited S&P 500 outperformance with a range of factors, including the increased productivity, higher profit margins, accelerating earnings per share and cleaner balance sheets of U.S. firms.
However, Bartolini added, U.S. firms got an extra boost from fiscal support. "While Europe practiced more austerity, the U.S. added to its debt levels," he wrote.
Layoffs Surge, Thanks To Musk, DOGE
What Might Disrupt S&P 500 Dominance?
"Extreme valuations" for U.S. markets have been justified by a "growth premium," Bartolini wrote. But if growth were to slow, "that valuation premium could become a headwind."
A shift in capital flows also presents a risk to S&P 500 dominance, he says. Bartolini notes that roughly 73% of the increase in global market capitalization flowed to the U.S. over the prior decade.
"While 10 years ago, the U.S. received 50 cents of every dollar invested, it now needs far more to maintain its market share."
That raises a question: Could Trump launching a global trade war, slashing the size of the federal government, and pulling back from the U.S. role in protecting Europe lead to a change in capital flows?
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