'One of the biggest shifts in investor preferences': How the US has lost its shine for investors

Investors are used to seeing the US dominate performance tables but the first half of 2025 has painted a different picture.

There has been a reshuffle in global stock market leadership, with the likes of the UK staging an unexpected resurgence and the US no longer the top choice for many investor portfolios, according to AJ Bell.

As illustrated in the table below, the S&P 500 has posted a modest 2.1% return so far – outstripped by the FTSE 100 (9.6%), DAX (17.3%), Bovespa (14%) and Hang Seng (17.3%).

Source: AJ Bell, ShareScope. Data 1 Jan to 20 Jun 2025

Dan Coatsworth, investment analyst at AJ Bell, said: “Tariffs, downgrades to earnings and economic forecasts and geopolitical conflict were the defining factors for markets in the first half of 2025. They’ve caused considerable uncertainty which has affected asset prices, as well as business and consumer confidence.”

This has prompted “one of the biggest shifts in investor preferences for years”, he said, with the US – which had dominated the global stock market for an extended period – losing out as a result.

Market darling no longer

At the heart of the US market’s underperformance lies growing concern over the economic implications of president Donald Trump’s second-term trade policies, said Coatsworth.

The push for protectionism has heightened fears of a potential pullback in the pace of US economic growth as costs mount for US consumers and businesses.

“Trump wants individuals and companies in the US to stop buying from foreign sources and buy domestically, yet his trade policies are making life much more expensive for them,” Coatsworth explained.

With the consensus earnings forecast for the S&P 500 cut by 4.9% so far this year, companies like Best Buy, Target and WK Kelloggs are erring on the side of caution in their earnings updates.

“On top of this, four of the Magnificent Seven group of mega-cap tech stocks have delivered negative returns for investors so far in 2025,” he added.

This is a far cry from 2023 and 2024, when these seven companies “effectively drove the US market higher”.

Source: AJ Bell, ShareScope. Data 1 Jan to 20 Jun 2025 (total return).

To make matters worse, the World Bank has this month slashed 0.9 percentage points off its GDP forecast for the US in 2025 and Moody’s downgraded its ‘AAA’ rating.

But US equity valuations remain high with the S&P 500 on approximately 22 times forward earnings.

“Put all these negative factors in the mix and it’s easy to see why investor appetite for all things US has waned,” said Coatsworth.

From losers to winners

With the US under pressure, investors have rotated into other regions – particularly those benefitting from policy-driven growth catalysts.

Germany especially has benefitted from a renewed focus on infrastructure and defence spending after years of valuation stagnation for German equities.

“[The German government’s] pledge to spend big provides a tailwind for many companies in the DAX index, including defence contractors, construction groups and energy providers,” said Coatsworth.

In contrast, the UK market is home to companies with the defensive qualities that investors are looking for during periods of uncertainty, such as tobacco and telecoms.

The UK stock market also has a wealth of defence contractors – such as BAE Systems, which is up 65.3% year-to-date - which have attracted investor interest against a “backdrop of increased government spending on areas like cybersecurity and military forces”, Coatsworth said.

Source: AJ Bell, ShareScope. Data 1 Jan to 20 Jun 2025 (total return).

Unlike the S&P 500 or DAX, the FTSE 100 remains one of the cheaper developed markets, trading at 12.5 times forward earnings.

“It means the UK still stands out when investors are looking for value opportunities in the wake of Trump’s tariff chaos,” said Coatsworth.

“It also helps that the UK has already got a trade agreement in the bag with the US, further enhancing the country’s attraction to domestic and foreign investors.”