The S&P 500 is starting to close its 2025 gap to foreign stocks as Trump leans in to tariff fights

U.S. equities, particularly the S&P 500, have largely withstood escalating trade tensions due to their composition, with UBS projecting further gains despite volatility. Conversely, international markets, including Europe and emerging economies, are showing July underperformance against the S&P 500, reversing first-half trends, with tariff-targeted nations like Brazil experiencing significant declines. This divergence highlights the increasing pressure on diversified global portfolios and the ongoing debate over U.S. stock valuations relative to the rest of the world, as noted by Goldman Sachs, emphasizing the renewed case for diversification.

Analysis

A significant divergence is emerging between resilient U.S. equities and underperforming international markets, driven by escalating trade policy. Despite increased trade tensions, the S&P 500 remains near recent highs, a strength the White House perceives as an endorsement of its tariff strategy. Analysts at UBS Global Wealth Management attribute this durability to the index's tech-heavy composition, which insulates many of its largest constituents from goods-based tariffs, and project a further 4% climb to 6,500 by next June. Conversely, global markets that outperformed the U.S. in the first half are now faltering. In July, major ETFs tracking Europe, emerging markets, and the world ex-U.S. have begun to underperform the S&P 500. The impact is particularly acute in nations directly targeted by new U.S. levies; the iShares MSCI Brazil ETF (EWZ) has declined 4.6% in July following the imposition of a 50% tariff. This short-term momentum favoring U.S. stocks is contrasted by valuation concerns from Goldman Sachs, which highlights that valuation spreads between the U.S. and the rest of the world are at historical highs, reinforcing the long-term strategic case for diversification.

Key Decisions for Investors

• Investors with U.S. large-cap exposure may find justification to hold positions, given the S&P 500's relative insulation from current trade actions and bullish near-term forecasts, while remaining vigilant for policy-driven volatility.
• Re-evaluate international holdings, particularly in markets directly impacted by tariffs such as Brazil (EWZ) and Canada (EWC), as they are exhibiting clear negative performance in response to specific U.S. trade policies.
• Consider the tactical conflict between strong U.S. market momentum and the strategic valuation argument for international diversification, as U.S. equities are trading at historically high premiums to the rest of the world.
• Monitor the performance spread between U.S. and global equities as a key indicator; a sustained reversal in favor of the U.S. may signal a durable shift, whereas a return to international outperformance could validate valuation-based strategies.