“American Idiot” ¹
Michel Saugné, CIO, La Financière de l’Échiquier (LFDE) │July 2025
The second half of 2025 has ushered in a quiet but profound shift: American stock market exceptionalism is faltering. After a decade of growth fuelled by low interest rates, technological dominance and a strong dollar, the cracks are beginning to show. Since the start of the year, US stocks, particularly large caps, have significantly underperformed European ones (in euros). This decline could well signal the end of a cycle, a view supported by certain indicators. The Hopes & Dreams ratio, which measures the proportion of valuations not backed by solid fundamentals, is approaching levels not seen since the dot-com bubble. Meanwhile, Donald Trump’s return to the White House is adding a strong dose of unpredictability to the political environment: a sevenfold increase in tariffs has raised the spectre of a new trade war. Against this backdrop, it is becoming imperative to reduce overexposure to US equities and debt, and to rediscover the merits of the rest of the world.
In the United States, the rise of retail investors is now behind a significant proportion of price formation. Driven by apps and trends, they are increasing volatility. This new reality calls for adaptability, and a reaffirmation of active, conviction-based management grounded in fundamental analysis.
A geographical reallocation is underway. The European stock market, long neglected, now appears to be a credible alternative, particularly through value stocks, small and mid-caps, and certain secular themes driven by pan-European plans, such as defence, energy transition and infrastructure. In the bond market, Treasury bills are showing signs of fatigue. International investors, including those from China and Japan, could therefore accelerate their diversification into gold and assets denominated in euros or Swiss francs. This presents a unique opportunity for Europe to bolster the global standing of the euro.
The outlook for bonds has changed significantly. In the United States, interest rate volatility calls for caution. In Europe, however, the normalisation of credit spreads[2] offers fertile ground. The German fiscal pivot is acting as a powerful driving force. Indeed, the rise in defence spending is a major long-term strategic theme. The NATO countries’ stated target of spending 5% of GDP sends a clear signal. More than 50 listed companies in Europe are exposed to the defence, cybersecurity and sovereign technology sectors. With visible growth, robust order books and strong political support, this theme deserves a strategic place in investment portfolios.
Other forces could also shape the second half. Firstly, there are the emerging markets, which are currently benefiting from tailwinds: a weaker greenback, lower energy costs and renewed flows of US capital. The return of the BRICS countries could be a surprise. Another factor is the recovery of European small and mid-cap stocks, which are supported by their domestic exposure, all-time low valuations and improving earnings momentum. Finally, the healthcare sector remains structurally sound, driven by innovation, demographics and resilient pricing power.
In a world that is transitioning from globalisation to fragmentation and from the almighty dollar to other safe havens – and perhaps even from passive management to a rediscovery of the virtues of active management – we must think differently, act with discernment and embrace contradiction.