According to Morgan Stanley, since the beginning of 2025, the trend of U.S. assets outperforming global markets has started to reverse, with most non-U.S. equity markets, particularly in Europe and China, surpassing U.S. equities. The magnitude of this reversal is approximately 10% to 20% of the trend observed from May 2023 to the end of 2024.

So, does U.S. exceptionalism still make sense?

In a report released on the 19th by J.P. Morgan's Nikolaos Panigirtzoglou team, it was noted that from May 2023 to the end of 2024, U.S. assets outperformed global markets, characterized by a stronger U.S. dollar, superior U.S. equity performance compared to non-U.S. equities, tech stocks outperforming non-tech stocks, and U.S. Treasuries underperforming global bonds. However, since early 2025, this trend has reversed, with non-U.S. equities, especially in Europe and China, outperforming U.S. equities. J.P. Morgan highlighted that the reversal for most assets is around 10% to 20% of the previous trend, with Chinese equities experiencing a more pronounced reversal.

While some indicators suggest that the reversal of the U.S. exceptionalism theme may have progressed significantly, from a price and positioning perspective, this reversal remains ongoing and relatively limited. J.P. Morgan believes that the reversal in dollar strength and U.S. equity fund flows relative to global markets remains modest. This implies that, despite shifting market dynamics, the U.S. continues to hold significant importance in the global economy and financial markets.

Non-U.S. Equities Gain Favor as European Economy Shows Positive Signs

Changes in fund flows are a key manifestation of this reversal. J.P. Morgan's data shows that the percentile of fund inflows into European equities has approached the highs of 2023, indicating a significant increase in investor interest in European markets. In contrast, the percentile of fund inflows into U.S. equities has declined.

Since the beginning of the year, the reversal in dollar strength and U.S. equity fund flows relative to global markets has been relatively mild, while the positioning of U.S. tech stocks versus non-tech stocks has seen little change.

Notably, the report points out that momentum signals for the Hang Seng China Enterprises Index and the Euro Stoxx 50 Index show signs of being overbought, but this overbought condition could persist for several months.

Economic data also provides fundamental support for this reversal. J.P. Morgan's Economic Activity Surprise Index (EASI) indicates that, since early 2025, European macroeconomic data has unexpectedly outperformed that of the U.S. This divergence suggests that Europe's economic recovery may be stronger than market expectations, while U.S. economic growth faces some uncertainties.

Additionally, optimism about a potential ceasefire in the Russia-Ukraine conflict has boosted European equity performance, further bolstering investor confidence in European markets.

Challenges in the U.S. Treasury Market: Can SLR Exclusions Bring Relief?

The U.S. Treasury market is facing similar challenges. Over the past few years, the Supplementary Leverage Ratio (SLR) has constrained liquidity in the Treasury market.

J.P. Morgan notes that if SLR exclusions are implemented, they could alleviate some of the inconveniences in the Treasury market, but the impact may be limited. This is because, beyond SLR constraints, factors such as dealer balance sheet limitations and pension funds' demand for duration continue to affect Treasury market performance.

Finally, the cryptocurrency market has not been immune to these shifts in market sentiment. Since peaking at $3.72 trillion in December 2024, the market capitalization of cryptocurrencies has fallen by $153.72 trillion. Bitcoin and Ethereum futures are nearing backwardation, signaling weakening demand. This trend may be linked to declining risk appetite among investors and reflects concerns about global economic uncertainty.