ClockWise: Could US equities lead the bounce back?

While most year-ahead outlook pieces expected US exceptionalism to continue into 2025, the reality has proven quite the opposite so far this year, with the S&P 500 index recording its 11th quickest correction since 1928 by falling over 10% in the 16 trading days to 13 March.

This weakness in US stocks was led by megacaps, with the Magnificent 7 index falling into bear market territory (-20% from highs) and Tesla shedding more than half of its market capitalisation over the same period. This sudden pessimism sparked from investors shifting their focus from US President Trump’s policies that are expected to have a positive economic effect (tax cuts and deregulation) to those with an immediate negative impact (tariffs, mass lay-offs and deportation). Sky-high valuations of the companies leading the sell-off didn’t help either.

There is a saying that investors can stop panicking when policymakers start panicking. While we are not expecting policymakers to blink just yet, hopes have risen over recent days that the reciprocal tariffs due to be announced on April 2 might be more targeted than previously expected, with Trump stating that “there will be flexibility.” This change in tone, while it may not last for long, has helped the performance gap to close between Europe and the US over the last few days (chart 1). We continue to prefer Europe to US in the current backdrop, with policy uncertainty looming in the US and the ‘Fed put’ likely still far away given upside risks to inflation. However, we have reduced our conviction over recent days in light of new developments.

Chart 1: Relative performance of regional equity futures

Source: Bloomberg, RLAM as at 25 March 2025. Proxy for Asia Pacific based on 70/30% weights of SPI 200 (Australia) and Hang Seng (Hong Kong).

Another catalyst for a pause in recent trends could come from earnings. Since the end of last year, we have been flagging an improvement in analyst expectations for Europe against a weakening in the US. This development has been a big driver of our thinking around regional equity positioning. While the trend might continue in the medium term as fiscal policy is likely to boost European activity further, we have noticed a change in direction over the recent week (chart 2). Following a 16% outperformance of European equities against the US market over the past three months, it might be time for investors to take some chips off the table and reassess the situation after the next important policy announcement from US President Trump – the April 2 deadline for reciprocal tariffs.

Chart 2: RLAM regional earnings revision scores

Source: RLAM, LSEG Datastream as at 24 March 2025. Improving/deteriorating score indicates analysts revising higher/lower their earnings expectations relative to other regions.

Our RLAM Investor Sentiment indicator, which registered one of the most depressed readings in its more than 30-year history (0.5th percentile) earlier this month, has since been on the mend (chart 3). While retail investors remain extremely bearish amid the elevated uncertainty, equity market volatility has been falling from recent highs and company directors have now turned more constructive and started to ‘buy the dip’ in their own shares. Pessimistic times have historically offered great opportunities for active investors to add back to risk assets at lower prices – it pays to buy when others are fearful. However, when sentiment is as depressed as it was a couple of weeks ago, it is usually better to wait and see how the situation develops and not rush in to ‘catch the falling knife’. We have been more cautious in this backdrop over recent weeks, but should investor sentiment continue to improve, we wouldn’t be surprised to see equity markets recover back towards all-time highs. As always, we remain on the lookout for any tactical opportunities that the market may present us and are ready to act accordingly.

Chart 3: Investor sentiment recovering from depressed levels

Source: RLAM as at 25 March 2025. The RLAM proprietary Composite Sentiment Indicator takes into account measures related to stock market volatility, private investor sentiment and company director buying. A reading of zero reflects average sentiment.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.