The S&P 500 saw its first 10% correction after 72 weeks. It is an unusual correction, since equity markets outside of the US remain unaffected and the decline has been one of the most consistent selling streaks. The S&P 500 saw 16 consecutive days without a two-day positive return. On top of this, the ratio of the S&P 500 to gold has broken down to a new four-year low and is at risk of falling to the lows of 2020.
It turns out that the newly appointed US leaders do not like the price of holding the world’s reserve currency. Rather, they would like to devalue the USD. This comes at a price: a mild recession looms at home, as uncertainty and higher prices for imported goods will be a challenge even for super-strong US private households. For investors, instead of sticking to yesterday’s bull trends, it is best to acknowledge that US policymakers are themselves putting an end to US exceptionalism. Thus, global investors will have to follow suit and look at diversification opportunities.
The end of fiscal profligacy in the US
Following recent developments, we are downgrading our long-standing Constructive stance on the information technology sector and US equities. Since October 2022, the IT sector has been at the forefront of the equity bull market, significantly outperforming the broader market (+101% vs +62% in USD total return). However, entering 2025, consensus positioning in favour of US equities was overwhelmingly bullish, resulting in elevated valuations. In our 2025 Market Outlook, we anticipated a broadening of market leadership beyond US technology stocks after two years of concentrated returns. At the same time, we acknowledged that after two very good years in the US market, a correction could be on the horizon.
The simultaneous end of fiscal profligacy in the US and fiscal austerity in Europe has triggered a sharp reallocation from US to non-US equities. Whether this divergence is sustainable hinges on whether the US slowdown remains contained or escalates into a full-blown recession. In the case of a moderate slowdown, we expect the rotation into non-US equities to persist, supported by more attractive relative valuations. However, if the US enters a recession, triggering a broader bear market, other equity markets – particularly in Europe – will struggle to remain insulated. For now, with US equities in oversold territory and a short-term countertrend likely, we see this as an opportunity to further diversify into non-US markets in the coming weeks, but where should investors look?
How to diversify away from US equities
In Europe, we favour German mid-caps and Swiss equities, with the latter offering a combination of defensive quality and reasonable valuations. In Asia, we maintain an Overweight stance on Chinese equities, which are in a cyclical bull market, while Indian equities provide long-term structural growth exposure. Within the IT sector, we continue to prefer software over hardware and semiconductors.
Gold: Safe-haven seekers are slowly but surely returning
While it seemed much more a question of when, not if, gold would break above the USD 3,000 per ounce level, it nonetheless marks a major milestone. Looking back, it is striking to see that previous milestones have always been reached in times of crisis. In 2009, during the Global Financial Crisis, gold broke above USD 1,000 per ounce for the first time. It then surpassed USD 2,000 per ounce during the Covid-19 pandemic. While we believe it is too early to call today’s circumstances a ‘crisis’, it seems clear that concerns about the trajectory of the US economy due to President Trump’s erratic policies have been instrumental in pushing gold prices higher.
The outlook for US growth and US politics has moved back into the driving seat of the gold market after being no more than a source of volatility before. Even though a recession does not seem imminent, slowing growth and rising risk aversion in financial markets should be sufficient to lure safe-haven seekers back into the market. Holdings of physically backed products, our preferred gauge of Western world safe haven demand, have recorded renewed inflows as of late. This should be due to the decline in US bond yields on the one hand and a reshuffling of portfolios out of risky assets and into safe havens, such as gold, on the other.
How to react to the recent market moves?
It may be difficult to imagine that stock markets elsewhere can defy gravity when US stocks keep tanking, however, we recommend using any short-term rebound in US equities as an opportunity to further diversify into non-US markets, with a focus on European financials and industrials, German mid-caps, Swiss equities and safe havens. Still, let us not forget that investor discipline, and not making rash decisions, is needed in such an environment – now more than ever.