How Will Your 401(k) Fare if Trump Tariffs Push Foreign Investors Out of U.S. Stocks?

Trade wars reshape global investment flows, so it’s no surprise that President Donald Trump’s April 2025 tariff announcement sent investors worldwide scrambling to rethink their U.S. equity positions. The potential for prolonged economic fragmentation, supply chain disruptions, and declining corporate margins fundamentally shifted the thesis that had driven foreign investors to hold 17% of U.S. equities as of 2024, up from 9% in 2006.

But why would foreigners rotate out of the U.S. equities market, and why would that matter for Americans’ portfolios? We dig into this below.

From FOMO to GTFO

In the months before Trump’s tariff announcement, some analysts were worried about too much foreign investment, with billions rushing into American markets in late 2024 and early 2025. In 2024, the S&P 500, the quintessential U.S. large-cap index, rose 23.9%, almost five times that of the 4.9% return for the MSCI All-World Ex-USA Index, which tracks mid- and large-cap non-U.S. stocks.

With many world markets trading sideways since the pandemic—the U.S. economy was among the few to show significant growth in recent years—foreign investors feared missing out on the gains from the so-called Magnificent Seven (the likes of Apple Inc. [AAPL], NVIDIA Corp. [NVDA], Tesla, Inc. [TSLA], etc.) and other propulsive American stocks.

Pointing to data showing run-ups in foreign purchases of U.S. stocks before the 1987 crash, the dot-com bubble in 2000, and the 2008 financial crisis, Ed Yardeni wrote in his eponymous research newsletter, “Their buying has a record of being a contrary indicator. They tend to be big buyers right before bear markets.”

The April 2025 tariff announcement changed all that tout de suite, with the U.S. “exceptionalism premium”—the bump American stocks get from the perception of U.S. markets as uniquely stable and predictable—the first to go. “We tainted our brand—our U.S. brand,” Peter Boockvar, chief investment officer at Bleakley Financial Group, told Barron’s. “Foreigners have a huge amount of ownership of U.S. assets, and if they decide to take their money home,” prices for bonds, equities, and the dollar would see the effect.

Foreign Flight Plans

In addition to seeking safe havens in their own domestic bonds and currencies, there are other reasons for capital rotation out of the U.S. They might amount to an end to a bullish era for foreign investors in U.S. stocks:

• U.S. vs. world: Besides the potential political reasons to not want funds in the U.S. during a trade war with one’s own country, there’s also a fundamental asymmetry: companies in every country would face U.S. tariffs, but not from other countries (except those previously in place); U.S. companies would potentially face tariffs from every country, a significant disadvantage in international trade, from which the U.S. pulled in $3.2 trillion for its exports in 2024.
• Margin compression for U.S. companies: Higher input costs from tariffs are very likely to squeeze profit margins for many U.S. corporations, cutting earnings and stock performance.
• Supply chain disruptions: U.S. companies with global supply chains—including members of the Magnificent Seven—will face significant problems rebuilding them due to the tariff regime.
• Relative valuation concerns: Foreign market equities have much lower “multiples” (cheaper for expected earnings) than the U.S. Invesco analysts pointed to China, in particular, where assets are “inexpensive and under-owned.”
• Significant fiscal stimulus elsewhere: While significant fiscal cuts are promised in the U.S., other countries are promising to end the era of fiscal austerity to help protect their industries; Germany has already done so, in a “regime change” that’s been dubbed a “potential game-changer” for Europe.
• Stagflation fears: Tariffs could set off stagflation in the U.S., limiting the U.S. Federal Reserve’s ability to cut interest rates to support economic growth.

The Bottom Line

Any significant rotation of foreign capital away from U.S. equities, closing a decade of American market dominance, would have significant implications for U.S. stock prices and American retirement portfolios.

What we’re seeing, Justin Leverenz, a chief investment officer at Invesco, said in a company memo, is “the end of [American] exceptionalism. And this may only be the beginning.”