Highlights

• A “postmodern” investment era favors active management amid high U.S. valuations.

• U.S. tech recovery contrasts with Europe’s early 2025 outperformance and evolving sector leadership.

• Monetary policy uncertainty, rising bond yields, and geopolitical risks sharpen the outlook.

The U.S. stock market’s remarkable rebound, led by tech giants, contrasts sharply with the broader, more diversified momentum seen in European equities. The divergence underscores a shifting terrain for investors, driven by valuations, policy uncertainty, and global macroeconomic forces.

U.S.: Tech Resurgence Amid Elevated Valuations

Recent weeks have seen a resurgent tech rally on Wall Street—most notably, Alphabet surged over 9%, driving gains in the Nasdaq and S&P 500, while Treasury yields fell on softer-than-expected job openings. The Magnificent Seven—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—now account for nearly one-third of the S&P 500’s weight, amplifying both upside potential and index fragility. Yet, persistent concerns over stretched valuations have tempered enthusiasm, particularly after tech stocks led recent declines when bond yields rose.

Europe: Early Strength, Resilient Domestic Plays

In contrast, European stocks outperformed early in 2025, propelled by more attractive valuations and rising demand in sectors like utilities and banks. Exports faced downward earnings revisions, prompting strategists to favor domestic cyclicals. While the STOXX Europe 600 and STOXX autos basket posted gains, overall market performance remains competitive with the U.S.: as of early July, STOXX 600 was up ~6.6% year-to-date compared to S&P 500’s ~6.8% . Currency shifts have fueled this outperformance too, with the euro climbing ~14% against the dollar.

Navigating the ‘Postmodern Cycle’

Goldman Sachs now frames the market environment as ‘postmodern’—a departure from bet-on-inflation and globalization cycles—where fragmented leadership, AI-led productivity gains, and valuation gaps demand nimble stock picking. Passive U.S.-index strategies may underperform in such a landscape; instead, active managers, especially targeting European undervalued names, may seize an edge.

Bond Yields, Inflation, and Policy Risks

Adding complexity, global bond yields have climbed—even reaching multiyear highs on 30-year European debt—reflecting fiscal jitters and elevated issuance . In the U.S., weaker labor metrics have heightened speculation of rate cuts, though rising yields earlier pressured equity valuations. Continued trade uncertainty, the evolving fiscal landscape, and asymmetric policy shifts further cloud the near-term outlook.

Market psychology remains volatile: investor bias toward U.S. blue-chips persists, yet momentum is building for broader geographic diversification and active management.

Forward Look

Moving ahead, investors should monitor how monetary policy pivots—particularly from the Fed and ECB—will influence bond yields and equity valuations. Tech earnings and AI-capex trends in the U.S. will dictate whether the Magnificent Seven sustain dominance or give way to broader recovery. In Europe, watch domestic cyclicals, inflation trajectories, and geopolitical shifts for stock selection opportunities. In this fragmented ‘postmodern’ regime, balancing exposure across sectors and regions—and adopting active strategies—may be essential to capturing asymmetric upside while managing risk.