Trend Reversal or a Countermovement

in the Long-Term Trend?

In a globally interconnected economy, assets often move in lockstep – but this year, we have witnessed a remarkable divergence. In the U.S., long-term interest rates have remained elevated due to persistent inflation and a high fiscal deficit. In the Eurozone, yields have risen despite declining inflation rates, largely attributable to the easing of Germany’s debt brake. European equities posted substantial gains, whereas major U.S. indices remain in negative territory from a European perspective. The only constant in this environment was gold, which appreciated against all major currencies.

Just last year, “American exceptionalism” and the dominance of the U.S. dollar shaped market commentary, as US stocks posted their strongest relative performance against Europe in a long time. This year, the focus has shifted to a potential erosion of American primacy, driven by mounting national debt and growing geopolitical isolation. As investors, it is unwise to cling rigidly to a single conviction – but equally unwise to overhaul one’s view every quarter. Uncertainty is a constant in any complex system. Benjamin Graham puts it succinctly: “In the short run, the market is a voting machine, influenced by emotions and headlines. In the long run, it is a weighing machine, where fundamentals determine value.” For our positioning, the key question is this: Are current developments merely a short-lived countermovement within a long-standing trend, or do they mark the beginning of a lasting trend reversal?

One of the primary drivers of American outperformance over the last decade has been the technology sector. Its dominance has been built on three pillars: technological leadership, exceptional profit growth, and a steadily rising valuation premium relative to the broader market. Yet, lofty valuations come with inherent risks – a reality that became evident in the first half of this year. Recent developments have challenged the seemingly unassailable market position of U.S. tech giants. News of the “Deepseek” artificial intelligence model emerging from Asia has raised questions about their technological edge and the long-term profitability of their massive data-center investments. Additionally, new US import tariffs have made large technology companies likely targets for retaliatory trade measures. Compounding these pressures, the sector has been hit by one of the largest inventory-reduction cycles among semiconductor manufacturers — the market’s strongest performers sector since the financial crisis — triggered by temporary overproduction following a post–COVID surge in demand. Together, these factors have weighed heavily on the technology sector and, by extension, the U.S. and world indices it continues to dominate.

We view these as temporary dislocations within an otherwise intact long-term trend. The pace of technologization remains rapid, and there is much to suggest that artificial intelligence could accelerate it even further. The fact that 90 percent of the market capitalization of the MSCI World Technology Index is domiciled in the U.S. speaks volumes about American technological innovation.

Another key reason for the historical outperformance of U.S. equities, confirmed by our analysis, is that American companies have consistently delivered higher long-term returns on equity across all sectors. Structural advantages play a decisive role: a large homogeneous domestic market, an investor-friendly regulatory environment, and favorable tax policies.

By contrast, Europe continues to struggle with structural shortcomings despite political efforts, which helps to explain its comparatively lower profitability. Over the past two years, the main drivers of European index performance have been financials — buoyed by rising interest rates — and, to an even greater extent, the defense sector, benefiting from increased defense spending. From a long-term perspective, however, the financial sector lacks a track record of generating excess returns, and due to low equity ratios, often faces problems in difficult times where government intervention becomes necessary. Currency fluctuations also influence regional performance in the short term. We regard them as secondary, since exchange-rate effects tend to neutralize over time.

Globally operating companies benefit from a weaker home currency: their products become more competitively priced on the world market, and profits earned in stronger foreign currencies translate into higher reported earnings. This currency tailwind is especially pronounced when a company incurs a large portion of its costs in the weaker domestic currency, while generating revenues abroad.

As fundamental equity analysts, our focus is on individual companies’ track records and overarching long-term trends observable in specific sectors. These two factors explain the lion’s share of long-term value creation. Companies are highly agile by nature and adapt swiftly to changing conditions. Whether facing the financial crisis, the COVID-19 pandemic, or this year’s import tariffs, many businesses have demonstrated the ability to adapt quickly – often returning to record profits and stock prices within remarkably short periods.

Governments, by contrast, are far less nimble. In the U.S., election promises of austerity were bypassed by even larger spending plans or revenue shortfalls. Even in traditionally frugal Germany, the debt brake has been relaxed for defense and infrastructure spending. Many countries now run fiscal deficits exceeding those of the COVID “special effects” year. The state has become a central economic driver — funded by debt whose costs are now rising noticeably. With central banks scaling back bond purchases, the market has lost a major price-insensitive, price-supporting buyer. In the absence of renewed central bank buying, there is a growing risk of a durable shift in the interest rate environment — with significant implications for how all asset classes are valued.

We do not expect high government debt levels to be addressed through spending discipline. As a result, only growth and inflation can keep the debt burden manageable. In such an environment, real assets are the preferred asset class. While they may be subject to increased volatility in the short term, they offer the strongest protection and the greatest long-term potential.

Although globalization may face temporary headwinds, its fundamental momentum remains intact. Likewise, we are convinced that the unstoppable forces of technologization and demographic change will be the key drivers of future value creation. Our responsibility is to apply disciplined analysis to identify the sectors and companies that lead — and benefit from — these transformations, without being swayed by regional sector weightings.