Are US stocks set to dominate in the second half?

The Nasdaq 100 index reached a record high on Tuesday, and the S&P 500 is a mere 150 pips away from a record high. US stock indices are taking a breather,  and futures markets suggest that they will open mostly flat later on Wednesday. This is to be expected. There are not too many drivers for markets right now, and it is normal for investors to pause when markets reach record highs. The question is, will US stock market dominance come back into play?

While US stocks have outperformed their European peers in the last month, the S&P 500 is higher by 5%, while the Eurostoxx 50 index is down by 1%, if you zoom out then the picture looks different. European indices have massively outperformed their US counterparts so far this year. The Dax index is higher by 18%, the Ibex in Spain by 19% and the FTSE MIB in Italy is higher by 15%. In contrast, the S&P 500 is higher by 3.5% and the Nasdaq by 3.1%. The FTSE 100 and Eurostoxx 50 index have also outperformed and are higher by 7% each.

Are German defense stocks coming off the boil?

European stocks have been led higher by German companies, and German defense stocks. Germany’s commitment to greater fiscal spending on defense and infrastructure has driven the defense stock theme this year. Rheinmetall is up 177% YTD and is set to replace luxury giant and Gucci owner Kerring in the Eurostoxx 50 index.

As you can see, Rheinmetall has outperformed Nvidia by a wide margin this year.

Chart 1: Rheinmetall and Nvidia, normalized to show how they have moved together this year

Source: XTB and Bloomberg

However, could the tide be turning? Defense stocks have sold off this week, and in the past week, Rheinmetall is down more than 2%, compared to a 2% gain for Nvidia. As Germany’s plans for defense spending are now well known, and as tensions in the Middle East calm down, the AI theme is coming back to entice traders.

The relative performance of Rheinmetall and Nvidia is reflecting the slowdown in demand for defense stocks. In the past month, Nvidia has started to outperform the German defense giant. This is an early indicator that the US tech giants could come back into vogue this summer, as defense stocks cool off after a strong run in the first half of 2025. This could be the US’s time to shine.

Chart 2: Rheinmetall and Nvidia, normalized to show how they have moved together in the past month

Source: XTB and Bloomberg