US stocks bear the brunt of global economic uncertainty

Last week saw US stocks fall while stocks in other regions rose — some quite significantly. While the MSCI USA Index fell 1.4%, the MSCI Europe Index, the MSCI UK Index, the MSCI Japan Index, and the MSCI China Index all posted material gains.¹ Why are US stocks behaving so differently than other stocks in other regions when European Central Bank (ECB) President Christine Lagarde admitted just last week that “the economic outlook is clouded by exceptional uncertainty”?² Here are a few thoughts:

1. Monetary policy support

There’s more monetary policy support being provided to the European economy — as evidenced by the ECB’s rate cut last week — than the US economy so far this year, and that’s likely to continue. This was the ECB’s seventh cut in the course of its last eight meetings, and it seems ready to lower rates again if necessary. We also got a rate cut from the Bank of England in February, and we could see more this year. Conversely, the Federal Reserve (Fed) hasn’t cut rates thus far in 2025 and appears more comfortable waiting to see the impact of tariffs on the US economy before easing monetary policy. As Fed Chair Jay Powell explained last week, “As that great Chicagoan Ferris Bueller once noted, ‘Life moves pretty fast.’ For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”³

2. Fiscal policy support

Fiscal stimulus is expected to increase in the eurozone and even the UK, with increased defense spending becoming a priority, as well as in China, as policymakers focus on increasing domestic consumption and combating headwinds created by US tariffs. Chinese economic growth was strong — better than expected — but it’ll take significant stimulus to counter the headwinds of high tariffs. Conversely, the US is still aggressively cutting federal spending, which is certainly not stimulative. And any potential tax cuts may not be an adequate countervailing force to this substantial drop in government spending.

3. Valuations

Valuations have been much higher for US stocks than for stocks of other regions. For example, the MSCI USA Index recently had a trailing price-to-earnings (P/E) ratio of 25.11 and a forward P/E ratio of 20.53.⁴ Compare that to other major indexes:⁴

• MSCI Europe Index: Trailing P/E ratio of 15.53 and forward P/E ratio of 13.73
• MSCI UK Index: Trailing P/E ratio of 13.27 and forward P/E ratio of 11.94
• MSCI Japan Index: Trailing P/E ratio of 13.74 and forward P/E ratio of 13.55
• MSCI All-Country World Index: Trailing P/E ratio of 20.57 and forward P/E ratio of 17.23

Some investors may be able to ignore, or at least tolerate, high valuations for long periods of time. However, in periods of significant uncertainty, valuations can matter more. In this environment of “exceptional” uncertainty, investors may be even more unforgiving when it comes to high valuations.

4. US policy uncertainty

Policy uncertainty can have a chilling effect on business investment and hiring plans. We saw that during the tariff wars in the first Trump administration. This time around, the tariff levies are broader and deeper, and the uncertainty is much greater. For example, last week Goldman Sachs’ CEO shared, “The prospect of a recession has increased with growing indications that economic activity is slowing down around the world. Our clients, including corporate CEOs and institutional investors, are concerned by the significant near-term and longer-term uncertainty that has constrained their ability to make important decisions.”⁵ And US policy uncertainty is increasing by the day, with recent fears arising that President Donald Trump will fire Fed Chair Jay Powell, which could be very negative for markets. In short, this level of policy uncertainty can be very destabilizing and runs counter to the US government’s historical role as a stabilizing force for the economy and markets.

5. US consumers

The epicenter of the tariff wars is likely to be the US consumer, and that’s going to be problematic for an economy that’s so heavily dependent on consumer spending. That’s particularly so if we see a material increase in unemployment, which could result from current fiscal policy. We saw a “pull through” of US spending in March, with better-than-expected retail sales, but that may only add to headwinds facing retail sales going forward.

Looking ahead

Looking ahead, there’s likely to be more volatility and uncertainty, especially in the US. It’s important for investors to focus on their investing time horizon, which is typically far longer than an average recession or a presidential term. It’s also important to remember key concepts such as maintaining one’s investment policy, remaining well diversified, rebalancing regularly, and even looking for opportunities to take advantage of the uncertainty and volatility.