(The opinions expressed here are those of the author, a columnist for Reuters.)

Donald Trump’s win in the recent U.S. presidential election has, unsurprisingly, been a boon for U.S. equities. But his victory may ultimately prove to be the catalyst that the rest of the world needs to end the U.S. market’s long record of outperformance.

This may sound illogical. At least that’s what Morgan Stanley, Goldman Sachs, JP Morgan and many other major brokers would likely say. They’re all calling for continued outperformance by U.S. equities in 2025.

At first glance, their forecasts make sense. U.S. equities have outpaced their peers for the better part of 15 years after hitting a low during the Global Financial Crisis in 2009.

That trend has only accelerated since Trump’s arrival on the political scene. The U.S. equity weighting in MSCI’s All Country World Index (ACWI) has gone from around 50% when Trump first took office to more than 65% today – a record high.

Investors are clearly heeding this message. U.S. retail buying post-election has been the strongest in almost three years, while foreign purchases of U.S.-listed ETFs have hit a new high. These investors are likely counting on a repeat of Trump 1.0, with tax cuts and deregulation driving strong economic growth and a booming stock market.

But here’s where the story gets a little tricky.

When Trump was inaugurated in 2017, U.S. stocks were trading below their long-term average at roughly 16x forward earnings. Today, they’re priced for perfection at almost 23x.

Back then, inflation wasn’t a major concern and interest rates were under 2.0%. Today, inflation remains above the Federal Reserve’s 2.0% target, despite falling significantly over the last two years. And the yield on the 10-year U.S. Treasury is currently around 4.45%, roughly 200 basis points higher than the level in 2017.

Perhaps most importantly, the U.S. fiscal deficit is roughly double what it was when Trump first entered the Oval Office. It currently hovers around 6% and is poised to go higher.

How much higher depends on many variables, including whether Trump actually follows through on his campaign promises. But, if taken at face value, a platform of massive tax cuts, huge tariffs and mass deportations certainly doesn’t sound deficit-friendly, and the proposed spending cuts are unlikely to be a panacea.

And given the huge deficit, elevated interest rates, and general skittishness around inflation, markets may not respond so kindly this time around if the president starts to implement some of his more unorthodox policies.

REST OF THE STORY

So what does this mean for the other two major global markets: China and Europe?

Trump’s policies – particularly the threat of wide-sweeping tariffs – could certainly impair trade and growth globally.

But they could also be the catalyst for long-needed positive policy action in both China and Europe.

China has a bit of a head start. It’s already busy injecting both fiscal and monetary stimulus into its economy, and, importantly, it’s seeking to boost domestic consumption while competing on advanced technologies such as artificial intelligence and electric vehicles.

It has also been broadening its trading partners in recent years. In fact, it currently exports more to Southeast Asia than to the U.S.

All of these trends are likely to accelerate following Trump’s re-election.

LIFTING THE BRAKE

In Europe, leaders have long known that the bloc needs to improve its competitiveness. (Just look at the lengthy report recently published by former European Central Bank president Mario Draghi.) But action tends to take a little longer in a 27-country collective.

Much will depend on Germany, the largest economy in the euro zone and the most vulnerable in a trade war. It’s soon set to have elections. No matter who wins, Berlin will have plenty of fiscal room to stimulate its economy. The question is whether it removes the ‘fiscal brake’ that’s stopping it from using this space. The spectre of Trump 2.0 may tip the scale.

Meanwhile, Europe is already expected to see its economic growth accelerate next year, while the opposite is true for the U.S., according to various broker forecasts. The ECB’s rate-cutting cycle is also less likely to be held hostage to politics than the Fed’s.

But investors are sticking with the U.S. for now. Chinese equity valuations are close to record lows both on an absolute basis and relative to the U.S. And Europe has sold off as the consensus Trump trades have led to a record valuation gap with the U.S.

Experienced investors know that valuation gaps don’t close on their own. What they need is a catalyst.

We may have it.

Jay Pelosky is the Founder and Global Strategist at TPW Advisory, a NYC-based investment advisory firm.

(Writing by Jay Pelosky, jaypelosky@pelosky.com)