From MAGA to MEGA

If the last few years have taught us anything, it’s that the focus of markets can shift dramatically and rapidly. Yet even by those standards, the last couple of weeks have been historic. 

President Donald Trump’s second term to ‘Make America Great Again’ initially looked to have ominous implications for Europe. Interestingly, there would have been a lot of Europeans looking towards America and observing an economy that was already doing ‘great’, at least in comparison to what they were witnessing back home.

US exceptionalism has been the name of the game over the last few years, whether you looked at the GDP growth or its domestic stock market performance. Over the last two years, the US economy has grown on average almost 3% per year while Europe has flatlined at an average of just 0.6%.*

The major concern coming out of the election was that this trend would continue. A combination of pro-growth policies in the form of tax cuts and deregulation would further support the domestic US economy, while concerns around tariffs and the administration’s America First agenda would be another knock to Europe and its manufacturing and export engine. 

Yet, just four months since the election, this perception is shifting quickly on both fronts. The euphoria that initially followed the US election is being dampened by the sequencing of Trump’s policy agenda, which is not as pro-growth as initially hoped. While the thought of tax cuts and deregulation excited the markets, the focus has shifted towards efficiency and austerity in an attempt to control the deficit, while expectations that tariffs would be used in moderation and predominately as a negotiation tool is also being challenged.

While tariffs may still ultimately end up being a negotiation tool, the hokey cokey of ‘tariffs on’, then ‘tariffs off’ alongside threats that are much larger in scope and size than the market had originally been anticipating, is already causing disruption and uncertainty. This is starting to come through in business and household surveys, and in stock prices. At the time of writing**, the S&P 500 is down more than 8% from the recent highs and has erased essentially all the gains that were made post the election. 

In contrast, sentiment around Europe is moving in the opposite direction, albeit from low expectations, partly motivated by a significant shift in US foreign policy. This wake-up call has inspired the incoming German government to dramatically change its debt rules to permit an increase in its defence and infrastructure spending. It is being likened to Mario Draghi’s ‘Whatever it takes’ moment to support peripheral Europe back in 2011. 

Some of the big reasons for Europe’s underperformance in recent years have been the lack of spending, investment and innovation in Germany, with its debt levels flatlining at around 60% of GDP since the global financial crisis. At the same time, the US has increased its debt-to-GDP from around the same level to over 100%*, supported by an acceleration in private investment.

Europe’s historic problem of underinvestment has laid the ground for Germany’s spending spree. The country’s conservative fiscal position, alongside an electorate frustrated with lacklustre growth, now allows it to radically change directions and increase the size of its deficit without running up against sustainability concerns. While there remains a lot of uncertainty as to exactly how this all plays out, estimates suggest this endeavour could lead to additional 2.5% of GDP in spending annually compared to what has previously been expected. This, together with separate EU decisions about creating a joint funding program for defence spending, has the potential to materially change the medium-term outlook for European growth, inflation and government debt levels.  

The initial market focus has been on the German government bond market (Bunds). More supply is expected to fund this expenditure and the knock-on impact of stronger growth has pushed borrowing yields higher, leading to the worst single day for the Bund since 1990.

Other parts of the European financial market, however, have reacted much more favourably. Several European equity markets are up almost double digits**. If you go back just a few weeks, European high yield bond spreads were trading almost 60 basis points (bps) wider than their US counterparts at 360bps vs 300bps. Fast forward to today, the euro market has been outperforming and is now trading tighter than the US at 313bps vs 340bps***. A similar shift between the US and Europe has also happened within the investment grade market. Finally, the euro is showing signs of life again and last week had its best performance versus the US dollar since 2009. 

Undoubtedly, there are still lots of uncertainties as to how exactly Germany’s fiscal expansion will play out, given the new government’s proposals still need to be ratified by German parliament. Once that hurdle has been cleared, focus will turn towards the speed of implementation, which will be multi-year. In the meantime, the underlying threat of tariffs being placed onto Europe will not go away. But for now, the market is clearly shifting its view from ‘Make America Great Again’ to ‘Make Europe Great Again’. In the new MEGA paradigm, we expect more opportunities for active management within European fixed income markets, and especially within credit.                                                                                                                                                                                         

* IMF World Economic Outlook October 2024

** 13th March 2025

*** Ice Indices 13th March 2025

Important information

This is a marketing communication and as such the views contained herein are not to be taken as advice or a recommendation. The value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. Our EMEA Privacy Policy is available at www.jpmorgan.com/emea-privacy-policy. This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l.and in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority.  Material ID: 09tq232908072204