In the last couple of weeks, we have witnessed what some would consider a sell-off, others a correction, but whatever it’s called, a decline in value in many US indices & stocks. On the other hand, European stocks and indices have recorded significant inflows and growth. In this blog, we explore why is that so, as well as try to answer the question of what could be expected in the medium term.

United States of America

Starting off with the US, under President Trump, both he and the country have been in the headlines, with him being far, far more than his predecessor, but given the President’s vocal demeanor, this was to be expected after the election. With President Trump’s election promises, such as the closing of the border and tariffs on countries that treat the US unfairly, as well as the start of the work of the new government agency, DOGE, there has been a lot of uncertainty that hit the US equity market.

Select US indices performance (2025 YTD, %)

Source: Bloomberg, InterCapital Research

This is reflected in the performance of US indices, with many of them reaching their all-time high values before retreating several percent. After the inauguration on 20 January 2025, the uncertainty has intensified. For years under President Biden, the country led a quite timid policy, both internal and external, which has been largely upturned by the new President. Many new executive orders were passed, fixing many of the problems caused by the lack of leadership in the previous administration, but could all of this negative sentiment be truly attributed to one man and his words?

The best answer right now is maybe, although with a twist. It is true that markets prefer certainty and stability, especially in the US with so many investments and huge liquidity. The new President’s leadership style is more focused on getting things done and making the changes that were promised, which in the short term can lead to changing statements and views on things. One doesn’t have to look far for examples of this, as news about the tariffs is continually coming in and changing. In fact, by the time this blog is published, something completely new could be announced.

Select US indices performance (2020 – 2025, %)

Source: Bloomberg, InterCapital Research

The twist comes then from several other things. Firstly, while the stock market did grow significantly in the last couple of years in the US, the economy, at least when an average American is asked, was getting worse and worse. As such, there was a divergence between what people experienced in real life and what was happening on the stock market. With shaky legs (at best) at its foundation, it was only a matter of time before equity experienced pressure as well. Secondly, and this point is important to stress – markets love spending, be it private spending or government spending. Under the previous US administration, the nominal GDP expanded by USD 7.3tn, or 34.6% to USD 28.4tn between 2021 – 2024. At the same time, the national debt increased by USD 6.6tn to USD 34.4tn, or 23.7%. Furthermore, personal consumption, measured by Personal Consumption Expenditures (PCE), expanded from USD 6.3tn to USD 21.8tn, or 40.6% in the 2021 – 2024 period.  

One also cannot discount inflation, which from December 2020 – December 2024, grew by 21.3%. Of course, inflation is driven by higher government spending, the “helicopter money” that was pumped into the economy, while increased private spending is something that both supports inflation, but is also caused by inflation, as people spend more money that will be worth less in the future, which paradoxically, makes everything more expensive. On the other hand, the new administration has focused on cutting government spending, getting the now significant deficit under control, but also raising tariffs, which in President Trump’s words could in the future replace many of the taxes in the country. One also cannot disregard energy prices, which recorded significant growth in the last couple of years but are now getting more and more under control.

These points are important to stress because what’s good for the economy doesn’t necessarily imply it would be good for the stock market, and vice versa. After all, if we look at an even longer time period, a pattern emerges. When Democrat administrations were in charge, spending was higher, and so was the stock market growth, as compared to Republican administrations, when the growth was more subdued, even though they’re considered more “pro-business”.

If we add to this the high interest rates, still higher than those in the EU, possible trade wars and retaliatory tariffs, as well as inflation, which still remains above the target, it isn’t surprising that the market in the US is correcting itself. One also has to take into account that inflation itself and the perception of its impact also caused the stock market to grow, as investors looked for ways to save their money’s value, something also present in the real estate market. Lastly, the signals about the dollar and the recent considerations about its devaluation are also playing a role, as the currency has grown significantly in the last couple of years, especially against the euro. However, while this might cause short-term pain, in the medium to long term, improvements could be expected. Tariffs, for example, while they might cause higher inflation in the medium term, could lead to stronger domestic industries, reduce trade deficits, encourage investments in innovation, increase Government revenue, and diversify the economy, as sectors that were being undercut would now be able to compete.

Europe

On the other hand, the situation in the EU as a whole isn’t as rosy as it might seem, as many of the economies, including Germany, are either stagnant or recording slow growth. This is something that hasn’t changed in the last couple of months, so why is there such an interest in Europe? Well, for one, Europe seems to be waking up from its slumber, even if its bureaucracy and overregulation are slowing everything down. This is visible in countries such as Germany, which, under its new chancellor, is trying to pass new reforms to its notorious debt brake, which limits annual structural deficits to 0.35% of GDP. The reforms include defense spending exemptions from this break due to the geopolitical situation in Europe. He also proposed a EUR 500bn Investment Fund dedicated to infrastructure and economic enhancements. These measures, if passed, would be supportive of investments.

On the EU level, it has unveiled the “Clean Industrial Plan”, which plans on allocating EUR 100bn to assist high-emission industries in transitioning to net-zero emissions. But more importantly, there is the recently announced ReArm Europe Initiative, a EUR 800bn plan that aims to enhance Europe’s defense capabilities. Furthermore, interest rates, while lower than in the US, might remain elevated for longer, as the higher levels of spending will invariably lead to higher inflation. The US, on the other hand, could face higher inflation, at least in the short to medium term, due to tariffs. There’s also the case of perception here, as the news of higher spending in Europe, as compared to the US’s focus on spending reduction, is also affecting investor confidence. Lastly, due to the aggressive rhetoric from the US, the dollar’s status as a safe haven is also being questioned.

Select European indices performance (2025 YTD, %)

Source: Bloomberg, InterCapital Research

All of this has led to growth in the European indices, with DAX expanding by 15% on a YTD basis, STOXX 600 by 7%, and FTSE 100 by 5%.

Select European indices performance (2020 – 2025 YTD, %)

Source: Bloomberg, InterCapital Research

In the longer time frame, except for DAX, the clear outperformance of the US indices compared to the EU ones is visible. Be it from higher spending, a better economic situation (at least on paper) in the US, or a more consistent policy, both domestic and foreign, many factors influenced the equity outflows from one side of the Atlantic to the other. Besides large European indices, smaller regional indices also recorded strong growth, both in the last couple of years and the last couple of months.

Select regional indices performance (2025 YTD, %)

Source: Bloomberg, InterCapital Research

While the recent increases and inflows in these indices cannot be directly attributed to equity inflows from the US, it cannot be said that regional equity is “boring”. While CROBEX10 and BET grew by “only” 3% and 4% on a YTD basis, respectively, SBITOP expanded by 21% in the same period!

Select regional indices performance (2020 – 2025 YTD, %)

 Source: Bloomberg, InterCapital Research

On a longer time frame, they performed as well or far better than many of the largest and most well-known indices in the world, and this is not taking dividends into account, which provide a solid 3-4% return a year in Croatia and 5-8% in Slovenia and Romania.

To summarize, the capital inflows into Europe are due to many factors, be they political, geopolitical, economic, or just perception-based. But looking at how many structural weaknesses the US has, only delayed by high spending, a correction in the market was only a matter of time. Going forward, one would be arrogant to say the market will end up higher or lower than x amount, as the whole picture is now changing on an almost daily basis. However, healing of the economy, a process that started in the US, and something that is clearly lacking in the EU due to the lack of leadership, overregulation, and significant bureaucracy, is something that in the medium to long term, should lead to better outcomes for all, and not just the ones able to invest significant amounts in the stock market.