The case for U.S. financial market exceptionalism has weakened - Capital Economics

Investing.com - A drop and partial recovery in U.S. stocks in recent weeks may point to a broader and sustained reset in broader equity markets, according to analysts at Capital Economics.

Unexpectedly weak economic data, spurred on partly by concerns over the impact of U.S. President Donald Trump’s tariff plans, has clouded the near-term economic picture. Economists and businesses have flagged particular worries that the levies could refuel inflationary pressures and weigh on wider growth.

However, other recent indicators have suggested that a downturn in the U.S. is not imminent, while Federal Reserve Chair Jerome Powell has said that the economy remains in a "strong" overall position.

Against this backdrop, the benchmark S&P 500 has underperformed so far in 2025, slipping by 1.6% year-to-date. The index also briefly fell into correction territory, typically defined as 10% decline from a recent peak.

Yet the rout has showed signs of easing, with the S&P 500 climbing by 2.6% over the past five days. On Tuesday, the index, along with the tech-heavy Nasdaq Composite and blue-chip Dow Jones Industrial Average, all eked out gains, thanks in large part to hopes that Trump’s expected April 2 reciprocal tariff announcement will be more limited than initially anticipated.

Investors have also moved to snap up relatively cheaper U.S.-listed stocks following a period of frothy valuations, the Capital Economics analysts said in a note to clients.

"As is typical after this magnitude of drawdown, equities have bounced back over recent days," they wrote. "’Buying the dip’ doesn’t necessarily require a rationale beyond the fact that, more often than not, equity markets recover from this type of drawdown in relatively short order."

Still, the analysts noted that, unlike prior market wobbles in recent years, U.S. stocks have largely trailed the performance of overseas markets. European stocks, in particular, have been buoyed by indications of increased appetite for spending among regional governments and lower equity valuations compared to American counterparts.

This trend -- coupled with a weakening dollar, ongoing uncertainty around Trump administration policy and a once-soaring narrative around artificial intelligence that is "struggling to reassert itself" -- has dented the case for "U.S. exceptionalism in financial markets," the analysts argued.