[Reuters Analysis] U.S. equity underperformance won’t take a summer holiday: Pelosky

By Jay Pelosky

May 9 - The first 100 days of Trump 2.0 are in the history books, and the U.S. has gone from leader to laggard in record time, with U.S. equities now significantly underperforming their global peers after a volatile month.

But forget April, it’s this summer that could prove decisive as investors seek to determine if this shift is a short-term move or a true secular change in market leadership.

U.S. equities ended up closing April roughly flat after bouncing from their post ‘Liberation Day’ lows, but the S&P 500 is still underperforming the MSCI All World Ex-U.S. Index by close to 1500 basis points in the year-to-date.

Meanwhile, U.S. first quarter annualized GDP growth came out last week at a disappointing -0.3%, meaning that, for the first time in years, the U.S. was outpaced by Europe, which grew by 0.4% in the period.

So much for U.S. exceptionalism.

Now, Europe is certainly not off to the races, and the U.S. data obscures more than it reveals, given the impact that tariff front-running had on GDP, in the form of surging imports and inventory buildups. But the data clearly suggests that the growth gap between the U.S. and EU has narrowed considerably.

These recent data releases are ultimately good news for the global growth cycle. Those who declare that there will be ‘empty shelves’ in the U.S. are unlikely to be proven right. There could be shortages in specific items, but the massive first quarter surge in imports – a 40% annualized jump – implies there will be plenty of stock across most goods.

On that note, after a sharp drop in ship departures from Chinese ports to the U.S. in early April, container volumes are now rising once again, suggesting the post-Liberation Day drop may have partly been in response to tariff front-running in March.

For its part, Europe is doing better than expected even before the massive German fiscal stimulus process has begun. This helps explain the outperformance of the region’s equities, where European banks are leading the way, up around 30% YTD versus flat performance by U.S. banks.

At the same time, it looks like tensions may be cooling between the world’s two largest economies, as the U.S. and China are set to begin tariff talks this weekend.

WHAT’S NEXT?

Investors survived a tumultuous April, but what can they expect through August?

This time frame includes the expiration of President Donald Trump’s 90-day ‘reciprocal’ tariff pause on July 9 and the expected arrival of tax cut legislation. U.S. Treasury Secretary Scott Bessent said a tax bill would be passed by July 4, though House Speaker Mike Johnson walked that date back to whenever the ‘X date’ – the day the U.S. hits its borrowing limit – occurs, which is expected to be before Congress’s August recess.

In the meantime, various court cases questioning the President’s legal authority to impose his broad tariffs are also underway. Preliminary decisions are due by August.

Trump can point to various possible sources of legal authority, such as Section 301, Section 302, and the International Emergency Economic Powers Act. But there are plenty of dissenters, including the Wall Street Journal editorial board and University of Michigan economist Justin Wolfers, who argues that only Congress has the prerogative to sign trade deals.

Imagine the market response if the whole tariff agenda gets tossed by the courts?

Regardless, Trump’s various U-turns and statements from Secretary Bessent suggest that the worst of the tariff pain is behind us, meaning levies will likely end up well below the levels proposed on April 2.

Tariff-generating revenue will, therefore, almost certainly disappoint, as have the cost savings from the Department of Government Efficiency (DOGE). This suggests any Republican tax cut program will substantially increase the U.S. fiscal deficit.

While this runs counter to Trump’s supposed focus on deficit reduction, his administration has made it clear that cutting taxes is “job one”.

Of course, successfully propelling a massive unfunded tax cut through Congress could further weaken the U.S. dollar and also cause pain on the long end of the Treasury curve.

So even if a détente in the trade war causes a temporary rip in U.S. equities, non-U.S. stocks are still apt to continue leading in this cycle, given the laundry list of concerns in the U.S. and improving prospects in other major economies.

Of course, the substantial rerating of U.S. tech assets could tempt back buyers, with U.S. big tech now trading at its smallest premium to the broad market since 2017, according to Raymond James. And there is always the risk that Trump’s policies cause a more severe U.S. slowdown that weighs on global growth.

The first 100 days of this administration have been memorable, but the next 100 days could end up being more meaningful.

(The views expressed here are those of the author. Jay Pelosky is the Founder and Global Strategist at TPW Advisory, a NYC-based investment advisory firm. You can follow Jay on Substack at The Tri Polar World.)

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