(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Jamie McGeever

ORLANDO, Florida, March 18 (Reuters) - As the end of the

first quarter approaches, world stock markets are in a curious

position. They are benefiting from capital flowing out of Wall

Street, but they also face major risks if the U.S. selloff turns

into a rout.

As President Donald Trump's trade war has snuffed out the

"U.S. exceptionalism" narrative, a yawning gap has opened

between U.S. equities and those in the 'Rest of the World'.

The selloff abated briefly and the S&P 500 notched its first

consecutive daily rises in a month. But Wall Street was back in

the red on Tuesday, and U.S. underperformance - the widest in

more than 20 years, by some measures - shows little sign of

reversing course.

Indeed, history suggests this gap could widen further,

although only if the U.S. economy avoids tipping into a serious

recession.

CORRECTION THRESHOLD

As the S&P 500 flirted with 10% correction territory last

week, 'RoW' markets were outperforming by as much as 9

percentage points, the biggest such gap since 2002, according to

strategists at Citi.

Historically, when U.S. corrections eclipse the 10% mark but

don't breach the 20% 'bear market' threshold, Wall Street

underperforms over the entire downturn, Citi noted. In U.S. bear

markets and recessions, however, no country or market is immune

- growth and asset prices everywhere suffer.

This scenario appears to be unfolding. Most economists agree

that U.S. growth will slow this year, but few think it will fall

off a cliff. While the Atlanta Fed's GDPNow model is signaling a

2.1% contraction in Q1, that remains an outlier.

Contrast that with the sudden improvement in Germany's

growth outlook thanks to Berlin's proposed fiscal bazooka.

Beijing also appears ready to do whatever it takes to support

China's economy and markets - call it the 'Xi put'.

Indeed, the tailwinds for RoW outperformance seem to be

building.

CROWDED OUT

The rotation out of Wall Street to the rest of the world has

been underway all year. Bank of America's March fund manager

survey shows that allocations to euro zone markets are the

highest since 2021, while U.S. allocations plunged at the

fastest rate on record.

This might suggest the switch has run its course. But the

same survey also showed that the most crowded trade is still

'long' the Magnificent Seven shares of America's biggest tech

firms.

And even though U.S. earnings multiples have fallen to the

lowest point since September, they remain lofty by historical

standards due to Big Tech's still-rich valuations. Indeed, U.S.

stock valuations remain well above those in other developed

markets, so this rotation may be far from over.

FINE LINE

"Corrections are healthy, they're normal," Treasury

Secretary Scott Bessent told 'Meet The Press' on Sunday, adding:

"I'm not worried about the markets.

Corrections are indeed normal and healthy, occurring roughly

once every couple of years with an average decline of 14%. As

Mark Riepe at Charles Schwab points out, of the 27 corrections

since 1974 including the current one, only six have gone on to

become bear markets.

But Bessent's remarks could also be interpreted as a sign of

how relaxed the Trump administration is about the current

decline, suggesting they won't act to prevent a further slide.

It's a risky stance to take at such a delicate juncture for the

economy.

And the RoW needs to watch out, because its outperformance

will likely only continue if the U.S. doesn't implode. As Dario

Perkins at TS Lombard notes, "Make no mistake - a U.S. recession

would bring down the entire world."

That would quickly wipe out Wall Street's underperformance,

but unfortunately, also a whole lot more.

(The opinions expressed here are those of the author, a

columnist for Reuters.)