The current state of global finance has been significantly shaped by the recent shift towards a more hawkish stance from the Federal Reserve, along with the repercussions of the so-called "DeepSeek shockwave." As a consequence, cracks have begun to appear in the logic underpinning the bull market in U.S. stocksInvestor sentiment is increasingly leaning towards the view that selling pressure on American stocks is mountingThis shift has become especially pronounced as inflation expectations in the U.S. rise due to tariffs, paired with uncertainty regarding economic forecastsA significant focus of concern is the growing concentration of market weight within the so-called "Magnificent Seven" - the seven major technology giants dominating indices like the Nasdaq 100 and S&P 500.

Recently, Alexander Altmann, a strategist from Barclays Bank, offered a fresh perspective, suggesting that now could be the ideal time for investors to look beyond the American stock marketHe recommended engaging in short-selling U.S. equities while simultaneously investing in European stocksHaving joined Barclays after a stint at Millennium Management, one of the world’s leading asset management firms, Altmann has been projecting optimism regarding the European markets for the past couple of months.

Altmann elaborated in a recent interview that he is not fundamentally bearish on U.S. exceptionalismRather, he posits that, in the short term, the narrative supporting the exceptional U.S. market has largely diminishedHe considers this tactical shift as a response to the current high valuations in the U.S. equity landscape.

Additionally, the performance of the European markets has been notably positive, characterized by a strong upward trendAltmann has coined this approach as the "winter leasing" trade, capitalizing on the historical peak performance of the Stoxx 600 index, Europe’s benchmark indexDespite the ongoing trade conflicts affecting the U.S. and its global partners, European corporate earnings reports have been robust, resulting in a significant rally in European stock prices that has outperformed their U.S. counterparts.

The Stoxx 600 index has achieved its best-ever start to a year in dollar terms, while the American tech giants have faced headwinds due to shifting monetary policies from the Federal Reserve and a lackluster earnings outlook coming down the pipeline

Advertisements

In stark contrast, the market concentration within European equities is far lower than in the U.S., reducing risks associated with trends in artificial intelligence which may be more pronounced on the U.S. side.

The seven technology giants that carry substantial weight in the S&P 500 and Nasdaq, collectively referred to as the "Magnificent Seven," comprise companies such as Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms, the parent company of FacebookThese companies have been central to the U.S. stock market's growth and subsequent all-time highs.

Since the beginning of 2023, these technology leaders have spearheaded the surge in the American stock market, drawing immense investment from around the globeTheir formidable performance is attributed to impressive revenues derived from artificial intelligence advancements, stable fundamental operations, strong free cash flow generation over the years, and increasing stock buyback activities.

The narrative of a bull market in the U.S. has been further complicated by the hawkish Federal Reserve stance and the effects of the DeepSeek shockAltmann’s assessments resonate with those from top investment firms like Morgan Stanley, which emphasize a significant shift in the investment landscapeThe report points out that the narrative bolstering the U.S. equity market faces challenges from the dual impact of the Fed's pause on interest rate cuts and the implications of low-cost AI advancements through DeepSeek.

According to Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, while January’s Fed pause on interest rate cuts was widely anticipated, many investors still hoped for a more dovish tone regarding future monetary policyHowever, the Fed failed to deliver the expected signals, compelling investors to recognize that policy-driven valuation expansion is nearing its limitsThe market’s driving forces are now shifting towards earnings realization, particularly related to the monetization of AI.

The DeepSeek phenomenon reinforces the notion that the bull narrative is undergoing a transformation

Advertisements

Shalett contends that we are entering a phase she refers to as “Great Normalization,” dominated by the return to normalized interest rates and valuations, with earnings growth poised to re-emerge as the driving force in equity marketsThe report highlights that the market's current focus may lead to a decline in the concentration ratios of the S&P 500, indicating a weakening trend among the major tech players.

DeepSeek has demonstrated the capacity to deliver powerful performance comparable to leading AI models with remarkably low input costs, challenging the traditional models developed by companies like OpenAI, which have historically commanded high development expendituresAs global investors reevaluate the financial commitments of U.S. tech giants towards AI, there is growing discontent over the seemingly excessive expenditures against the backdrop of DeepSeek’s cost-efficient offerings.

In light of the "low-cost AI storm" initiated by DeepSeek, investors have begun to question the rationale behind the aggressive AI spending patterns of dominant American tech firmsThe stark contrast between billion-dollar investment initiatives and DeepSeek’s more restrained financial strategy has raised alarms among investors, who perceive potential erosion of shareholder profits due to imprudent spendingShare price shocks have followed, as evidenced by Nvidia's near 17% drop on January 27, marking a historic loss of approximately $589 billion in market capitalization.

Amidst such challenges, Barclays Bank is advising investors to pivot away from U.S. stocks and explore opportunities presented by European marketsBarclays is not alone in this sentiment; a growing number of global investors are shifting their focus towards Europe, recognizing the long-standing undervaluation of European equities.

With stable political environments in the UK and France, central banks in Europe are demonstrating a markedly more dovish policy stance than their U.S. counterpart, which is contributing to a more favorable investment climate

Advertisements

Furthermore, fears over all-encompassing trade conflicts have tapered off, with tariffs now often perceived more as negotiation tactics rather than threats.

Concerns are also mounting regarding the influence of the Magnificent Seven, which have faced stagnation, leading to doubt about the U.S.'s dominance in AI technology and infrastructureA recent Bank of America study indicated that investor allocations for European stocks flipped from a net reduction of 22% to a net increase of 1%. This marks the second most significant increment in European market allocations within the last 25 years.

The shift in governmental attitudes towards AI development—from enforcing strict regulations to offering support—underlies the positive outlook on European equitiesAlthough European markets tend to showcase diverse industries, they also feature innovative leaders in fields like semi-conductors, software, and photolithographyFrench President Emmanuel Macron recently indicated that adopting a supportive regulatory framework is crucial for nurturing innovation, signaling that Europe might approach future tech innovation policies with a balanced focus on both support and oversight.

As preparation for an upcoming “AI Summit,” President Macron revealed plans for a monumental investment of €109 billion into France's AI infrastructure, setting the stage for increased funding across Europe dedicated to advancing AI technologies.

This ambitious aspiration signifies a commitment that could significantly attract domestic and international capital into the European stock market, especially as the region's tech sector is relatively undervalued compared to its American counterparts.

Last week's commentary from Bank of America’s strategist team echoed Alexis Altmann’s perspectives at Barclays, noting that DeepSeek's impact is diminishing the dominance of the American tech giants in the marketThe analysts pointed out that other markets have started generating stock returns that have outperformed the S&P 500 index since the start of the year.

Altmann's team suggests that the essential insight is for investors to seek opportunities beyond the U.S. stock markets and AI investments, advocating for a move away from American equities in favor of European stocks

Advertisements

Advertisements