The S&amp;P 500 Index surged 10% in the second quarter, far exceeding the gains of European stock markets. Has the exceptionalism narrative of U.S. stocks come to an end?
Recently, Wall Street rebounded strongly from tariff turmoil, reaching historic highs and significantly narrowing the gap with European stock markets. The S&amp;P 500 Index soared 10% in the second quarter, far surpassing the less than 2% increase of the European Stoxx 600 Index, and outperformed other major global indices.
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The outstanding performance of U.S. stocks surprised the market, as investors had generally expected that Trump's tariff policies would lead to a continuous flow of funds to other markets, especially Europe. By early 2025, European stock markets were expected to perform well due to anticipated increases in defense and infrastructure spending.
However, investors have returned to U.S. tech stocks. Shep Perkins, Chief Investment Officer at Putnam Investments, stated: &#34;In the second quarter, we saw the market return to traditional scripts.&#34;
The rebound in U.S. stocks has weakened investors' confidence in the sustainability of the European pivot strategy, although European stock markets have slightly outperformed U.S. stocks overall this year.
<h2>Signs of Fatigue in European Momentum</h2>
Although European stock markets are still leading U.S. stocks overall in 2025— the Stoxx Europe 600 Index has risen 7% this year, compared to a 5% increase in the S&amp;P 500 Index— recent poor performance in Europe has heightened investor concerns about the region's ability to maintain the momentum created by Germany's &#34;whatever it takes&#34; defense and infrastructure spending plans.
Dec Mullarkey, Managing Director at SLC Management, pointed out:
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The problem with Europe has always been profits, profits, profits. You can question U.S. stock valuations, but these stocks are supported by solid balance sheets. European trading is more speculative, depending on whether countries like Germany actually implement infrastructure plans.
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Optimism about Europe's prospects has not been meaningfully reflected in economic data. The European Commission downgraded growth forecasts last month following an escalation in Trump's tariff offensive. According to a survey released by the Commission last week, consumer and business confidence in the EU and Eurozone declined in June.
<h2>Multiple Factors Support U.S. Stocks</h2>
Meanwhile, U.S. employment data has exceeded expectations, and the unemployment rate remains stable, despite previous predictions that the trade war would have an impact. U.S. stocks have also been supported by retail investors &#34;buying the dip&#34; and record corporate buybacks.
NVIDIA, a major driver of the AI wave, reached an all-time high last week. Stocks that saw significant gains in the second quarter include Palantir, a data intelligence company chaired by Peter Thiel, which rose over 50%, and cryptocurrency exchange Coinbase, whose stock price doubled as investors flocked to cryptocurrency stocks.
As large tech stocks lead the way again, the previously widely expected trend of market return diversification has stalled. Equal-weight indices like the S&amp;P 500 have underperformed traditional market-cap-weighted indices this year
<h2>Divergence Remains</h2>
Some investors insist on expectations for a broader rotation in the U.S. stock market.
Goldman Sachs analysts stated in a research report last week:
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Even considering the higher equity return rates of U.S. companies, U.S. stock valuations have become excessively inflated. The era of diversification has begun, and we believe it will continue.
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Luca Paolini, Chief Strategist at Pictet Asset Management, believes:
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In the long term, the slowdown in U.S. economic growth and fiscal support in Europe should help narrow the persistent performance gap between the transatlantic stock markets. However, the momentum may have shifted too quickly earlier this year, and the truth may lie somewhere in between; the U.S. is not paradise, and Europe is not the worst place on Earth
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Goldman Sachs believes that U.S. stock valuations have become overly inflated, and the era of diversification has begun and will continue. However, some analysts argue that Europe's issues always revolve around profits, profits, profits. You can question U.S. stock valuations, but these stocks are supported by solid balance sheets. European trading is more speculative, depending on whether countries like Germany truly implement their infrastructure plans

- The S&P 500 index surged 10% in the second quarter, significantly outperforming European markets, which saw the Stoxx 600 index rise by less than 2%.  
- Despite a strong start for European markets in early 2025, concerns are growing over their ability to maintain momentum, particularly regarding Germany's defense and infrastructure spending plans.  
- U.S. markets are bolstered by strong employment data and record corporate buybacks, while some investors remain cautious about the sustainability of the recent performance gap between U.S. and European stocks.

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The historic high of the US stock market is testing investors' faith in the European stock market