NEW YORK (Reuters) - U.S. bond firm PIMCO said on Tuesday that waning business and consumer confidence under President Donald Trump's policies is eroding the edge U.S. capital markets held over the rest of the world, strengthening the case for investors to diversify globally.

Trump is set to unveil "reciprocal tariffs," aligning U.S. duties with those of other nations on April 2, a move that could deepen a market downturn caused by his economic policies that has already seen U.S. stocks post their most dismal three-month stretch since 2022.

"With both business and consumer confidence declining, the U.S. economic and financial-market exceptionalism of recent years could be fading," PIMCO said in a report written by Tiffany Wilding, an economist, and Andrew Balls, chief investment officer for global fixed income.

"With the U.S. signaling a pullback from some traditional functions ... long-held assumptions about the U.S. as a reliable international leader are being challenged," they said. "These changes may coincide with the twilight of the recent U.S. capital markets' outperformance relative to the rest of the world."

PIMCO expects U.S. protectionist policies will rekindle inflation and lead U.S. economic growth to slow this and next year, while government spending in Europe could improve those countries' economic prospects.

"There is a strong case to diversify away from highly priced U.S. equities into a broader mix of global, high-quality bonds," said the California-based fund manager, which manages nearly $2 trillion in assets.

At the same time, while European fiscal expansion could boost growth, it also makes their bonds less attractive, said PIMCO, which instead favors the UK and Australia for so-called 'duration' - or exposure to bonds that could benefit from cuts in interest rates.

More broadly, PIMCO said it anticipates the beginning of a multi-year phase where fixed income assets - such as corporate and sovereign bonds - may outperform equities.

"In this unusually uncertain macroeconomic environment, it's prudent to prioritize simple, stable investments over trying to predict the unpredictable," it said.