President Donald Trump's policies are causing ripples on Wall Street, but they're having a different impact overseas. While the U.S. administration is busy defending its economic strategies domestically, Trump has achieved a significant foreign policy goal: encouraging Europe to increase its military spending. After Trump's criticism of Ukrainian President Volodymyr Zelenskyy, key foreign leaders have reaffirmed their support for Ukraine and are boosting their defense budgets.
This shift is driving up the stock prices of international military companies, energizing stock markets in countries involved in Trump's trade disputes. European stocks are experiencing their best start to a year since 1998, and international stocks are outperforming U.S. stocks by the widest margin since 1990, according to data from JPMorgan Asset Management.
The STOXX Europe 600 index, which includes companies from 17 European nations, has risen 7.7% this year. Germany's DAX index has increased by over 15%, and France's CAC 40 is up about 9%. Meanwhile, London's FTSE 100 has climbed 5.6%. In contrast, the U.S. S&P 500 has fallen over 4.1%, and the Nasdaq Composite has dropped more than 8%.
NATO allies' renewed military commitments have contributed to these market movements. Trump has urged coalition members to raise their defense spending to 5% of GDP, well above NATO's current 2% minimum. The U.K. plans to increase its military budget to 2.7% by 2027, eventually reaching 3%. Recently, Britain announced a £2 billion boost in loans for U.K. defense firms to enhance exports to allied militaries.
In Germany, the likely incoming chancellor, Friedrich Merz, has agreed with lawmakers to ease financial crisis-era rules on defense spending, potentially unlocking €1 trillion to strengthen national defenses. French President Emmanuel Macron has also pledged to raise defense spending from around 2% to 3.5% of GDP, a €30 billion increase.
The European Commission has announced €150 billion in loans to its member states, backed by EU budget funds, and plans to relax fiscal rules to free up an additional €650 billion for military spending. These policy shifts have led to a surge in defense stocks across the region. German tank manufacturer Rheinmetall's stock has more than doubled this year. Shares of French aerospace and missile maker Thales have jumped over 70%, U.K. defense giant BAE Systems is up nearly 40%, and French fighter jet maker Dassault has risen 15%.
Analysts have been caught off guard by some of these developments. HSBC global equity strategist Alastair Pinder noted that they underestimated how the U.S.'s uncertain support for NATO and Ukraine would create a pivotal moment for the eurozone. HSBC has downgraded U.S. markets from "overweight" to "neutral," becoming the first major global bank to do so this year.
Despite Trump's campaign promises to tackle inflation and make America more affordable, he and his allies have hinted at potential economic challenges for consumers. Trump, who once highlighted stock markets as a measure of success, has downplayed recent declines, advising against focusing on the stock market. The White House has not commented, but officials are working to reassure Americans about their policies.
Treasury Secretary Scott Bessent emphasized the focus on creating long-term market gains and benefits for the American people, expressing little concern about short-term volatility. Meanwhile, Trump's efforts to reduce federal government size have prompted European authorities to consider deregulation.
European officials, facing a "wind of deregulation" from the U.S., are keen to maintain competitive conditions. The European Commission recently proposed "simplification measures" to benefit citizens and businesses, with the largest party in the European Parliament urging swift approval.
While European and British trading floors have seen a few exuberant weeks, this doesn't necessarily signal a broad economic revival. The U.S. recovery from the pandemic has outpaced other developed nations, and the American economy retains many strengths despite growing turbulence. In contrast, many foreign economies face unresolved challenges.
The U.K. is grappling with stagnant growth and rising borrowing costs, with 10-year government bond yields reaching levels not seen since 2008. The French central bank predicts GDP growth of just 0.7% for 2025, weaker than the previous year when France benefited from hosting the Olympics. Germany, once Europe's "engine," has seen economic output shrink for two consecutive years due to high interest rates, energy costs, and reduced global demand for exports.
JPMorgan Asset Management analysts caution that the sustainability of the rally in these regions remains uncertain. Economic activity surveys in Europe are flat, and potential U.S. tariffs could further threaten growth, given the EU's reliance on exports.
Despite these challenges, Dirk Willer, Citi's head of macro strategy, noted that "U.S. exceptionalism is at least pausing." Citi has upgraded its view of Chinese stocks, which have also risen recently. The Hang Seng index in Hong Kong is up 19.5% this year, and Chinese tech stocks have seen even larger gains. The KWEB exchange-traded fund has surged 25%, while the S&P 500's tech sector has fallen 9.5%.
In Asia, domestic factors like economic stimulus, lower borrowing costs, and enthusiasm around Chinese AI startup DeepSeek have boosted investor confidence. However, recent market performance is not a definitive economic indicator.
Xin Sun, a senior lecturer at King's College London, noted that international capital is seeking diversification away from the American market. He acknowledged that uncertainties introduced by the Trump administration will have global repercussions.