The Hindu: Published on 26 September 2025.
Why in News?
Global investors who had earlier pulled out of U.S. markets due to Trump’s tariff announcements and global uncertainty are now rushing back.
U.S. stocks have staged a strong recovery, driven by AI boom expectations and Federal Reserve’s first rate cut since December.
Weekly inflows into U.S. equity funds touched $58 billion (year-to-date high), while Europe and Japan saw stagnating or falling inflows.
Background:
In April 2025, global investors dumped U.S. stocks after steep tariffs were announced by the U.S. government.
By June, global fund managers were most pessimistic on U.S. equities and the dollar.
However, by September, Wall Street outpaced European and Japanese markets, with S&P 500 and U.S. small-cap stocks rallying strongly.
Key Issues:
Investor U-turn: Money managers who had diversified into Europe, Japan, and emerging markets are now pivoting back to U.S. assets.
AI-driven boom: Analysts see parallels with the 2000 dotcom bubble, raising fears of overvaluation.
U.S. dominance: Despite talk of diversification, global investors admit it’s hard to avoid U.S. markets.
Bond markets: U.S. Treasury yields have fallen, attracting fresh inflows, while European yields have risen.
Currency trends: The dollar, after weakness in early 2025, has stabilized and is edging up.
Impact on Global Markets:
U.S. markets: Seen as the most attractive, especially for small-cap and AI-related stocks.
Europe & Japan: Losing investor interest as their funds’ inflows dry up.
Emerging markets & China: Reduced allocation due to stronger prospects in the U.S.
Risk of bubble: If AI stocks crash, it could hit U.S. household wealth (already at 75-year high exposure to equities).
Economic and Policy Angle:
Federal Reserve: Rate cuts (110 bps expected by 2026) are key drivers for optimism.
Trump Tariffs: Still a medium-term risk—may raise inflation and slow U.S. growth.
Household Wealth: With 68% of U.S. household wealth tied to equities, any crash could trigger major consumer spending cuts.
Future Outlook:
Short-term (Positive): Momentum in U.S. equities to continue, supported by AI, Fed cuts, and investor inflows.
Medium-term (Cautious): Risk of overheating—dotcom-like crash remains a concern.
Global Strategy: While non-U.S. markets look undervalued, investors are unlikely to reduce U.S. exposure significantly anytime soon.
In summary:
Global investors have staged a major comeback into U.S. markets, reversing earlier pessimism. AI optimism and Fed rate cuts are fuelling Wall Street’s dominance, but risks of overvaluation and trade-policy uncertainty linger. The U.S. remains the “centre of gravity” for global finance, despite periodic attempts at diversification.
