Davos Post Mortem: The US Vibe Shift Goes Global

Authored by Huw van Steenis via WEForum.org,

• Investors and businesses have an optimistic outlook for the US while pessimism hangs over Europe’s lagging productivity, innovation and competitiveness.

• US banks are capitalizing on strong profits and regulatory adjustments, with billions being freed up for lending, mergers and acquisitions or buybacks.

• Amid more tariffs, policymakers are rethinking how to frame their portfolios and placing much of tech, rare earths and the energy transition under this umbrella.

Rarely have I found the Davos attendees so split in their investment outlooks.

American investors and business leaders were giddy over a possible “Golden Age,” though most were bracing for what promised to be a rollercoaster ride. Meanwhile, Europeans were moping about their economies, red tape and lack of innovation. And the Chinese delegation was the smallest in years.

Conversations revolved around the big challenges investors and corporates are trying to solve right now, from pivots in US policy to the languishing state of Europe and China, artificial intelligence market concentration, the risks of tariffs, what pessimism or optimism had already been priced in or where private markets might head next.

Sitting across 40 private meetings and panels, I better understood the mindset of businesses, investors and policymakers. Here are three of my takeaways.

1. The US vibe shift goes global but will Europe pick up on it?

US exceptionalism has been a driving force in markets for years. The dominant theme at Davos was whether the new administration would amplify this and diverge even more from Europe and Asia.

Meanwhile, US corporates are realigning their priorities fast. Their confidence means they are adding new initiatives whilst they “war room” what the administration’s first moves could mean for them.

However, the realignment also exposes weaknesses in large European markets. The largest European economies appear trapped in a prolonged economic malaise, outpaced by the US in productivity and technological innovation while losing ground to China in manufacturing competitiveness.

The bloc’s economic heavyweights, Germany and France – and in different respects, the UK – grapple with stagnation and mounting debt pressures. That said, much pessimism is already priced into Europe and much optimism in the US.

Every businessperson or investor I met believed that Europe needed a wake-up call on its approach to regulation, preventing it from tapping into private funding sources.

Consider Trump’s announcement this week of Stargate, a massive investment in data centres; as I pointed out in my recent Financial Times op-ed, Europe “straight-jacketed insurers from playing a larger role in financing the real economy via private credit or through buying senior tranches of securitizations.

“US data centre securitisations have totalled $35bn since 2018, according to JPMorgan Chase, while the EU has yet to see its first such transaction.”

So, will Europe roll back regulations? Businesses and investors seemed unconvinced, as the crisis isn’t big enough. That said, Davos can often be a trailing consensus.

In a conversation with Dan Murphy on CNBC, I shared an example from Nicolai Tangen, CEO of Norwegian sovereign wealth fund NBIM, when debating the biggest successes of the last five years – which in the United States is perhaps Space-X chopsticks landing or the launch of ChatGPT.

In Europe, Tangen argued it was the rebuilding of Notre Dame, “Because they were allowed to disregard almost all regulations and rules. It is unbelievable what Europe can achieve if they are allowed to.”

Perhaps US exceptionalism and the new administration will pressure Europe to pivot. But Davos folk fret European policymakers remain out of step with what Sir Niall Ferguson calls the “new global vibe shift.”

2. Banks return as private credit pivots

US banks are back – three of them had pop-up shops on the high street – the most I recall since before the financial crisis.

They are emboldened by a strong 2024 – the second-best profit year ever for the top six US banks – and thrilled that new global banking regulations (the Basel III endgame) may be reframed as “capital neutral,” with no net increase in capital requirements.

Morgan Stanley Research estimates this could free up $86 billion in surplus capital for lending, mergers and acquisitions, or buybacks.

Whether emboldened banks will be better able to fend off private credit was a hot topic this year. Traditional private credit markets are becoming more crowded and are likely to become increasingly picked over by banks as they put more capital to work in large loans for acquisitions.

Some leading private credit players are, therefore, striking out for greener pastures. They are pivoting to become less dependent on mid-market lending and acquisition finance and to become financiers of the huge capital expenditures needed for data centres, energy transition and other hard assets.

One hot debate at Davos was the growing partnerships between insurers and private credit. Such insurance capital is transforming the type of projects private credit can back.

For example, insurers prioritize steady 7-9% returns that align well with the needs of long-duration infrastructure financing. In some ways, this represents a return to an older financing model.

After the Second World War, large insurers financed and even owned transformative infrastructure projects and utilities.

I also observed a profound shift from my conversations about how banks are thinking of working with private credit.

As I wrote last year, “What we are seeing is the re-tranching of the banking system where banks parcel the riskiest slice to private credit, providing less risky lending themselves. Private credit could be the Ozempic to help banks on yet another diet.”

The dieting has now started in earnest.

3. Navigate tariffs via a national security umbrella

Policymakers worldwide are rethinking how they manage the economy. “Modern mercantilism” emphasizes national security, self-reliance and strategic sectors – a painful paradigm shift for many.

Tariffs, the most visible example of this shift and a major topic at Davos, are part of a broader strategy to curb trade deficits, bolster domestic industries and safeguard national champions.

Investors and corporates remain uncertain about how to navigate these changes. Many investors are pricing in “surgical tariffs” over broad-based ones, betting that US inflation concerns will limit sweeping measures, though policymakers and business leaders were less optimistic.

Some investors I met are reshaping portfolios around “national security.” This increasingly includes data centres (given tech’s priority), elements of the energy transition, rare earths (China processes 90% globally), reshoring industrial capacity and defence investments.

While US policymakers may look to “escalate to de-escalate,” keeping supply chains largely global, risks of some breakage and realignment remain real. Expect to hear more about national security-focused portfolios as tariffs and mercantile policies take centre stage.

The rest and the next

As always, at Davos, there were many other topics of discussion. AI was ubiquitous, with CEOs predicting 10-20% productivity gains.

The Ukrainian conflict and whether Russia’s funds should be confiscated for Ukraine’s reconstruction were also hotly debated. While consensus has shifted significantly over the past year, many European policymakers remain in denial about the scale of defence spending likely required.

Otto von Bismarck once said, “If revolution there is to be, let us rather undertake it than undergo it.”

The question for policymakers at Davos is not whether to try to respond to the US vibe shift but how and for investors and corporates to place their bets accordingly.