Markets sense opportunity as erratic US spurs 'middle powers' into action

• European stocks are outperforming U.S. markets, with London's FTSE 100 up 5% in 2026 versus S&P 500's 1.4% rise, and over 73% of STOXX 600 companies beating Q4 earnings expectations
• Defense stocks have surged 200% since February 2022, while European energy stocks are near 2008 highs as nations focus on supply chain resilience and critical resource independence
• Major new trade agreements include EU deals with Mercosur and Indonesia, and a Canada-China pact, though analysts note U.S. trade remains difficult to replace and impact will take time

Summary

Key Development: President Trump's erratic policies are fracturing the U.S.-led global order, prompting "middle powers" to forge independent trade deals and pro-active policies, creating new investment opportunities outside U.S. markets.

Market Performance: London's FTSE 100 crossed 8,900 for the first time, up 5% year-to-date, significantly outperforming the S&P 500's 1.4% gain. European energy stocks are near 2008 highs, while defense stocks have surged 200% since February 2022.

Investment Strategy Shift: Principal Global Investors ($594 billion AUM) and JPMorgan Private Bank are increasing exposure to non-U.S. equities, with major markets and emerging markets projected for double-digit earnings growth in 2026. Of 52 STOXX 600 companies reporting Q4 earnings, 73% beat expectations versus a typical 54%.

Trade Initiatives: New agreements include EU-Mercosur, Canada-China talks, and various partnerships among middle powers. BNP Paribas launched a €600 million European Strategic Autonomy fund in May 2025, focusing on defense, industrial resilience, and technology.

Currency Outlook: Analysts predict the Canadian dollar, euro, and Japanese yen could strengthen if deregulation and pro-growth fiscal policies materialize in their respective regions.

Policy Developments: Europe is advancing a "Made in Europe" strategy with minimum local content requirements, though it has divided EU countries. The European Central Bank plans announcements at this week's Munich Security Conference. Britain is considering participation in a multi-billion-euro EU defense fund.

Caveat: Analysts note U.S. trade remains difficult to replace, and new agreements will need time to generate meaningful economic impact beyond symbolic value.