Global Markets Diverge as U.S. Stocks Climb Toward New Peaks

On the eve of the anticipated U.S. Federal Reserve rate cut, the U.S. stock market continued to climb in early trading, reaching record highs, as global equity markets showed signs of diverging performance patterns. International stocks, particularly in Europe and China, have outperformed U.S. equities in the early months of 2025. This trend has been driven by a combination of geopolitical stability and favorable economic developments in key global regions. As of February 19, the MSCI All World ex U.S. index returned 7.2%, while the S&P 500 returned 4.5%.

Europe’s DAX index hit fresh highs in February, buoyed by optimism around military and economic support for Ukraine and a strong performance in the defense sector. Similarly, the Chinese stock market has seen a rebound, largely fueled by a surge in tech shares. Despite lingering uncertainties over trade policies and domestic economic challenges, investors have remained largely unfazed by recent political and economic developments in the region.

Historically, international stocks have experienced cycles of outperformance relative to U.S. equities. The last such period occurred during the early 2000s, when China’s economic rise helped global markets recover from the dot-com crash and the 2008 financial crisis. In contrast, U.S. stocks were more heavily influenced by domestic tech market dynamics. The current upswing in international equities suggests a shift in investor sentiment, with many viewing global markets as more attractively valued compared to the high prices of U.S. equities.

Goldman Sachs’ recent market outlook underscores the complexity of global economic dynamics in the wake of the 2024 U.S. election. The firm noted that Trump’s potential policy agenda, including tax cuts, deregulation, and protectionist trade measures, could have mixed effects on global growth. While U.S. equities may benefit from a more business-friendly environment, international markets, especially in Europe and China, could face headwinds from trade uncertainty and potential retaliatory measures. Goldman forecasts Chinese real GDP growth at 4.7% in 2025, assuming continued fiscal and monetary support from the government.

Looking ahead, the U.S. stock market appears to be entering a period of sustained growth, supported by strong corporate earnings, potential monetary easing, and a favorable fiscal environment. However, the divergence in global stock performance raises questions about the sustainability of current trends. The S&P 500 has historically been driven by a narrow segment of large-cap technology stocks, while global equities offer a broader range of valuation opportunities. This contrast has led to increased interest in international markets, particularly in emerging economies like India and China, where demographic and technological trends are expected to drive long-term growth.

Analysts also highlight the role of structural factors, such as monetary policy divergence and geopolitical developments, in shaping equity performance. The U.S. dollar’s strength remains a key variable, as changes in trade policies and global inflationary pressures influence currency valuations. In this context, the upcoming Fed rate cut is expected to provide additional tailwinds for U.S. equities while potentially creating volatility in international markets.