Trump dump? A US Dollar problem that boosts Europe?
Trump dump?
A US Dollar problem that boosts Europe?
The elevated valuations of US equities, in particular large cap technology stocks, pose a challenge to many investors. Over the past few years that has been justified by their impressive earnings growth. In contrast, non-US equities have struggled to generate profits growth. However, in recent weeks the non-US profits backdrop has improved.
A surprise in 2025 has been the weakening of the US Dollar. Justified in part by the relative changes in bond yields (US bond yields have fallen against other bond markets), and a reversal of US Dollar bullishness. A weakening US Dollar aids non-US equity profits. So far in 2025, a sharp improvement in profits from non-US equities has contributed to significant outperformance against US equities.
The combination of more attractive valuations, an improvement in the relative backdrop for earnings and expectations for further interest rate cuts in Europe, means we see a better backdrop, for the time being, for European equities in comparison with US equities.
Bond(s) in the driving seat
Bond markets are an often forgotten asset class, even though they may play a role in most balanced portfolios. The sound and fury over equity markets, and news reports that provide updates on the FTSE 100, or S&P 500 or Dow Jones suggest a familiarity with equity markets that most would not associate with bond markets.
But in some ways bond markets are instrumental in setting the investment tone. They reflect the assessment of interest rates over coming years, which depends on expectations of inflation and economic growth. Lower economic growth rates will typically lead to lower interest rates (and bond yields), and expectations for higher inflation would normally lead to higher interest rates.
Over the past few months there has been a change in expectations for interest rates in both the US and Europe and bond yields reflect that change. Since the turn of the year, German 10-year bond yields have risen by 0.45% whilst the equivalent US bonds yields have risen 0.29%. In the US the impact of Trump’s policy announcements are yet to fully impact economic growth or inflation, but we are struck that the bond market has priced in more interest rate cuts than at the end of 2024. This is presumably on the expectation of lower economic growth rather than interest rate policy being driven by inflation, given the almost universal agreement that Trump’s tariffs will result in higher inflation.
Higher bond yields in Europe and lower bond yields in the US have contributed to a weakening of the US Dollar, which has fallen by 6% since early January 2025.
Relative bond yields of Germany and the US and the Euro versus US Dollar exchange rate
Source: Bloomberg, Artorius
Given the policy changes agreed in Germany of higher public sector spending on infrastructure and defence spending to be financed by government borrowing, bond yields in Europe may remain higher for longer, even if the European Central Bank cuts interest rates further as expected in coming months.
Alongside the moves in the relative bond yield, it is worth bearing in mind that investor positioning matters. Using data from the Commodity Futures Trading Commission (CFTC) one is able to see how investors (speculators) are positioned towards a particular currency. Typically, these signals are useful from a contrarian perspective, i.e. if investors are overweight, as measured by the CFTC data in a currency, there may be a catalyst to reverse that positioning, and the currency then tends to fall.
Through much of 2023, investors held a ‘long’ or ‘overweight’ position in the Euro against the US Dollar. As the European economic outlook continued to remain subdued in 2024 in contrast with the upbeat US outlook, positioning shifted. Investors ended 2024 negatively positioned against the Euro. The chart below shows this shift as the light green bars fell from a net positive 115,000 in middle of 2024 to a net negative 95,000 in February 2025. Over the same period the Euro fell against the US Dollar from 1.10 to 1.03. If the positioning shifts (on the back of more fiscal stimulus in Europe and in reaction to Trump’s policy confusion), then it may well be possible that the Euro will continue to strengthen against the US Dollar. Other currencies such as Sterling are seeing similar patterns.
CFTC and the Euro versus the US Dollar
Source: Bloomberg, Artorius
The impact of profits
The weaker dollar, on the back of a change in relative bond yields, is also contributing to the recovery of non-US earnings (when priced in US Dollars). Stronger profits from non-US equities have contributed to the outperformance of non-US equities of late (most notably European and Chinese equities).
If Trump’s policies result in lower economic growth and lower interest rates compared to other regions, the US Dollar may continue to weaken. The longer that this continues then the more non-US equities may receive a boost to their profits.
US equity performance versus the Rest of the World (‘RoW’) appear to track relative earnings (Earnings per share ‘EPS’), with stronger US earnings driving higher relative to non-US equities
Source: Bloomberg, Artorius
If this continues then the long dominance of US equities versus all other equities may start to fade. In recent months the outperformance of non-US equities has coincided with their stronger earnings relative to US equities, which is a marked sea change from recent years.
US Dollar weakness may continue to benefit non-US equity profits for the next few months until the light can be seen at the end of the Trump tunnel, or until investors become ‘too complacent’ and move overweight Europe, but we would suggest we are not there yet.
In recent weeks, non-US equities (‘RoW’) are outperforming as the relative earnings momentum has shifted away from the US equity market
Source: Bloomberg, Artorius
US equity markets sell off
Policy announcements have created an uncertain environment for investors and businesses across the world. In recent weeks, we have seen announcements to apply tariffs on imports from China, but also the EU, Mexico and Canada. This is not a backdrop conducive to long-term certainty and planning. The “America First” approach to policy making has ironically seen European equities outperform US equities and a weakening of the US Dollar, as discussed above. Investors appear to be derisking exposure to US assets.
Market volatility is unsettling, but historically not unusual. Since 1980, the S&P 500 Index has fallen an average of 13.7% within any given calendar year but is positive 78.0% of the time with an average annual return of 10.3%. So, whilst it is tempting to change investment policy and long-term strategy in the face of market volatility, the lesson of the past is to remain disciplined and only reorientate investment strategy when long-term objectives change. A clear example of this was Covid, from which markets recovered quickly. But even in ‘normal’ times such as the market drops in 2016 and at the end of 2018, and through Trump’s first term of on-off tariffs, equities found their footing again. Whilst the actions of the Trump administration are worrying, (and contributed to us changing our asset allocation, moving underweight US equities and favouring European equities), we suggest that like all things, this (Trump and his regime) too shall pass.
Double digit declines are relatively normal even in years when the market rises (S&P 500)
Source: Bloomberg, Artorius
Don't try to time the markets. It's nearly impossible. Time in the market is what matters. While staying the course and continuing to invest even when markets dip may be hard on your nerves, it can be healthier for your portfolio and can result in greater accumulated wealth over time.
Maintain a diversified portfolio based on your tolerance for risk. It’s important to know your comfort level with temporary losses. Sometimes a market drop serves as a wake-up call that you’re not as comfortable with losses as you thought you were.
That said with Trump trying to change borders (with Canada) and appearing to enable Russia to disregard international treaties, alongside elevated US equity valuations, we can understand why investors are nervous.
Conclusion
The elevated valuations of US equities, in particular large cap technology stocks, pose a challenge to many investors. Over the past few years that has been justified by the impressive earnings growth. In contrast, non-US equities have struggled to generate profits growth. However, in recent weeks the non-US profits backdrop has improved.
A surprise in 2025 has been the weakening of the US Dollar. Justified in part by the relative changes in bond yields (US bond yields have fallen against other bond markets), and a reversal of US Dollar bullishness has seen a weaker Dollar. A weakening US Dollar aids non-US equity profits. So far in 2025, a sharp improvement in profits from non-US equities has contributed to a significant outperformance against US equities.
The combination of more attractive valuations, an improvement in the relative backdrop for earnings and expectations for further interest rate cuts in Europe, means we see a better backdrop, for the time being, for European equities in comparison with US equities.
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