Tuesday 10th June 2025
The story of this year has been global stock markets outperforming US markets. But recently, the US market has been catching up, thanks largely to the usual suspects: Big Tech.
Since the start of May, the US stock market (measured by the S&P 500 index) has risen by about 7%. Most of those gains have come from just seven of the largest tech companies. These companies have added a whopping $2.4 trillion in value in just over a month.
This group is sometimes called the “Magnificent Seven”. If you took those seven companies out of the S&P 500, the rest of the market would have only risen about 3%. So, while it looks like the US market is doing well, the gains are very narrowly focused.
Some experts worry that this sort of ‘narrow rally’, where only a few companies are driving the whole market, isn’t healthy or sustainable. Others argue that these Big Tech companies are global leaders with strong cash flows and competitive advantages, so it makes sense they’re leading the way. Either way, it’s clear that these tech giants are once again holding up the US market again. Could this be a resumption of the trend we had seen for the previous 8 years of US tech leading global markets?
Another big story in markets this year has been the weakening of the US dollar, even as US government bond yields (the interest rates on US government debt) have been rising. Normally, when US bond yields go up, the dollar gets stronger.
While there has been a shift in how people view the US economy, it’s not a crisis.
The US government is continuing to spend more relative to tax revenue, which means the deficit (the gap between what the government earns and spends) is growing. Donald Trump’s proposed tariffs (import taxes) also may make the US a less attractive place for foreign investors to put their money. These factors reduce demand for the dollar.
However, this doesn’t mean the US is in trouble. For one thing, foreign investors haven’t pulled out of US assets in a big way. In fact, money is still flowing into US stocks, including the S&P 500. And while a couple of US Treasury bond auctions didn’t go smoothly, most have been just fine. This begs the question, why is the dollar weakening?
One reason is currency hedging by foreign investors. If you’re an overseas investor buying US stocks or bonds, you care about the exchange rate. If the dollar weakens, your investment returns shrink. To protect yourself, many investors use ‘hedging’ strategies, which often involve selling dollars in the futures market, and this pushes the dollar down.
A second reason here may be changing expectations on US growth. For years, the US economy was growing faster than most of the world, which helped the dollar stay strong. But now, growth expectations in the US have softened, while other countries, especially in Asia, are stepping up their spending and investment. That’s led to a shift in where global investors are putting their money.
Even with these changes, though, the dollar is still strong by historical standards. And the rise in bond yields isn’t like the chaos the UK saw during the short-lived “Trussonomics” era under former Prime Minister Liz Truss. What is happening now is more like a reset, or a normalisation, after years of the US leading the global economy.
As global investors, right now there is nothing to worry about from US equities or the US dollar.
We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.
Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.
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