The recent high in the S&P 500 index is producting elevated excitement among US investors. However, it may be less impressive than it initially appears. Both South Korean and German markets achieved record levels recently, exhibiting increased growth of 37% and 28% respectively. Furthermore, stocks in Mexico saw a boost of 27%, while Hong Kong experienced a 20% rise. The overall performance of international markets has been favorable, displaying an approximately 15% increase. In contrast, the American market, which has gained a modest 5% this year, pales when compared.
This marginal improvement is certainly more attractive than the downturn seen in April, resultant of President Trump’s declaration of extensive ‘reciprocal tariffs’ on imported goods from a multitude of countries. Shortly after this disheartening update, US stocks recorded a drop of 16%. Subsequently, however, there was a delay in the imposition of these tariffs, pushing them back until July 9 and remaining poised for another potential postponement.
The US stock market has slowly recovered its Trump-induced deficits, in tandem with the changes in his harsh tariff conditions. At the onset of Trump’s presidency, the typical import tax was close to 2.5%. If implemented, the reciprocal tariffs would have eskalated this figure to approximately 28%, to such an extent that it would have forced a surge in prices for millions of consumers, abated corporate profits, and possibly triggered a recession.
While President Trump held off the execution of the reciprocal tariffs, he retained a list of others. These included a base tariff of 10% on the majority of imported goods, a 30% tax on most goods imported from China, and additional tariffs on various other products like steel, aluminum, and automotive items. Currently, the average tariff revolves around the 15% mark, thus marking a substantial increase.
By May, American stocks made a comeback, regaining positive terrain for the year, and continuing to gradually ascend thereafter. Investors seem to have accepted the reality of the tariffs imposed by Trump in their current state. Although growth may decelerate and inflation possibly inflate, the cumulative investor sentiment remains optimistic, with an expectation that public companies forming the US stock market will largely manage to defend their profit margins.
However, the once irrefutable magnetism of American stocks seems to have faded in Trump’s second term. Amidst the unpredictability and inconsistency in US policy decisions, the country’s stocks have underperformed international stocks throughout the year. The second part of this year may continue to be volatile, and the leading role of international stock markets is predicted to remain in place.
Contrary to President Trump’s claim, the foreign countries do not bear the burden of his tariffs. This misconceived interpretation is perhaps one of the reasons behind the struggling US stocks. It is the American importers that pay the tariffs to the US government immediately upon receipt of foreign consignments. These businesses front the cost of the heightened tariffs straight away, passing as much of the increased expense onto their consumers as they can, all the way down to the ordinary shoppers.
Between March and May, the US government gathered in $46 billion via import taxes, marking a substantial 283% growth compared to the same period in the prior year. These tariffs imposed by Trump could potentially generate an extra $300 billion annually. However, this increased government income is counterbalanced by increased expenses for both American businesses and consumers.
Despite their recent performance, the US stock market had consistently outperformed its global counterparts from 2015 onwards, with the disparity increasing notably after the arrival of the COVID pandemic in 2020. The generous stimulus provided both fiscally and monetarily during this health crisis accelerated the US economy out of recession, leading to a recovery that was unparalleled by any other major economy. Furthermore, the supremacy of US tech companies in areas such as artificial intelligence continued to drive the stocks higher. The muted performance of the US market in 2025 may possibly be a minor deviation from its longstanding trend.
However, several longer-term challenges are directing global investors away from the US market. The ever-growing national debt of America, now exceeding $36 trillion, has started to instigate instability in financial markets. Rather than addressing it, Congress, presently controlled by Republicans, is on the verge of approving additional tax cuts that are expected to append another $4 trillion to the debt.
The scenario that is likely to unfold includes the overflow of Treasury debt in the market to an extent where there may not be adequate buyers, leading to an increase in interest rates offered by the Treasury. All other interest rates are likely to elevate in accord, leading to increased borrowing costs throughout the US economy.
Simultaneously, the value of the US dollar has decreased by about 10% this year as demand for assets in dollars recedes. Interestingly, even the countries that face the brunt of Trump’s heightened tariffs are surpassing the American market. For instance, Mexican stocks are outperforming the US market by a significant 23 percentage points, European shares by 15 points, and Chinese stocks by 13 points this year.
This is indicative of the investing community’s belief that Trump’s tariffs would have a greater impact on US profits as compared to foreign ones. Some catching up of foreign stocks with the previously strongly performing American market is natural. Regardless, if Trump’s tariff policies persist, it could permanently alter the dynamics. While it may not rank last, the US is certainly not leading the pack.