Market Comment - May

In May, equity markets resumed a stunning rebound, helping global indices recover the losses inflicted during the previous two months. Investors believe that every harmful intervention from the U.S. President will be reversed once he realizes that financial markets do not approve of them. On Wall Street, this is called the TACO Trade, meaning Trump Always Chickens Out.

The market was once again led by Semiconductors, with the Semiconductor Index (SOX) gaining almost 18% mid-month and closing up 12.54% by the end of May, helping the Nasdaq 100 achieve a solid gain of 9.20%. The big loser was the Healthcare Sector, which fell 5.53%. The culprit was Donald Trump, who claimed he would cut the prices of medications by up to 90% in the U.S. On a relative basis, the past month amplified the worst underperformance of the healthcare sector versus the S&P 500 in over 25 years. Since 1935, such a strong underperformance has only occurred five times, and according to historical data, these events have consistently represented a buying opportunity—meaning it was safe to short the S&P 500 and go long on the healthcare sector.

Unsurprisingly, European indices underperformed the U.S., with the Stoxx 600 gaining 4.02%. But this is only half the story. Year to date, the U.S. dollar is down 8.94%. In U.S. dollar terms, European markets have outperformed the U.S. by 17.03% this year.

The United States has been the best place to invest over the past sixteen years. The U.S. share of global equity markets now stands at 60.50%, up from 41% in 2010. This is astonishing for a country that accounts for only 25% of global GDP. Of course, the rise has been amplified by mega caps like Apple, Microsoft, and Nvidia. However, there are several other reasons the U.S. has been such a great place to invest: deep capital markets, a fair legal system, stable rules and taxes, open capital markets, a business-oriented economy, and—last but not least—the great returns it has provided.

As a result, companies often choose to be listed on a U.S. exchange, as the U.S. is widely regarded as having the best stock market in the world.

The publication of the U.S. budget, which passed the House of Representatives last week and now awaits Senate approval, was a major talking point in May. Apparently, several members of the House did not read the full text before passing it, as the document contains nearly 1,000 pages. Fortunately, major investors with significant research resources have read it.

Foreign investors, who hold more than USD 60 trillion in U.S. assets, are growing increasingly concerned about the newly released budget. The "One Big Beautiful Bill Act of 2025" introduces retaliatory tax rate increases and the most sweeping changes to the tax treatment of foreign capital, under a section called Section 899. It challenges the open nature of U.S. capital markets by explicitly using taxation on foreign holdings of U.S. assets to further domestic economic goals—in other words, the weaponization of U.S. capital markets through legislation.

If this budget is passed in its current form, the U.S. administration could transform a trade war into a capital war. Sixty trillion dollars in foreign investments is a significant sum. Alan Cole of the Tax Foundation uses a military metaphor: "We are tossing a grenade out our own stuff while it's inside our house. But we are also tossing a grenade inside our own house."

This could mean that the U.S. is becoming less attractive to global investors at a time when its government needs them more than ever. Regrettably, Donald Trump believes the U.S. needs nobody. He has repeated that statement multiple times during press conferences, justifying the punitive tariffs imposed on trade partners—now seen as trade enemies.

If the U.S. administration continues to be unfriendly to foreign investors, capital will start flowing to other countries. It will be a slow process, but it will happen. There are viable alternatives, and once those nations begin to outperform the U.S., capital flight will accelerate. Emerging markets are already seeing heightened interest from the hedge fund community.