Is US stock market exceptionalism over?

One of the biggest factors that will determine the fortunes of investors is the fate of the US economy and its stock market.

Peaking at around 75% of the MSCI World index in February, investing globally has become a bet on the US, even as the recent drop in share prices has led to American companies making up 71% of the benchmark developed world global index today.

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US shares have become so dominant because they have risen so much over the past 15 years, led higher by technology stocks. Including dividends, over this period the S&P 500 has returned 586% while the FTSE All Share has returned just 199%.

But a number of factors could lead to the end of US exceptionalism, such as high valuations, a concentrated market, and politics, according to some investors.

Following Trump’s ‘Liberation Day’ tariff announcements, there were periods when US equities and bonds both fell, alongside the US dollar, which suggested that investors were losing faith in the country as a reliable place for their capital.

However, since announcing a 90-day pause on tariffs, the S&P 500 has risen around 17%, putting it only around 5% below its February peak. The index was boosted by progress on a trade deal with China, with tariffs cut for 90 days.

One fund group predicting the end of strong returns for US shares is Ruffer, where the Ruffer Investment Company has just 5.8% in North American equities.

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Ruffer co-chief investment officer Neil McLeish says that the US exceptionalism bull market only became extreme after the pandemic.

“The US continued to benefit from tech, energy and demographics, but it also exploited an additional source of exceptionalism – fiscal policy featuring deficits of unprecedented size during the pandemic and, since 2023, still exceptionally large,” he said.

But now he argues that a number of factors could end the bull run for American shares: US large cap companies are close to their highest levels of leverage over the past quarter century; the US now owes foreigners over $20 trillion (£15 trillion), amounting to 80% of GDP; and artificial intelligence capital investment will not lead to business benefits quick enough.

On top of these factors, McLeish thinks that Trump’s second term will be a destabilising force for markets.

“Combining this insight with the starting point for market valuations, we see trouble ahead,” he said.

He believes that one major portfolio implication will be a narrowing of the gap between US and non-US equity markets.

“An earlier disinflationary shock would narrow the spread primarily via a greater decline in the US market’s multiple, whereas a later inflationary shock may first involve some re-rating of cheap markets in other countries that embrace fiscal stimulus."

Short-term pain but long-term gains ahead?

In contrast to Ruffer, which sees a longer-term decline in US assets, some fund managers view the recent drop as a short-term blip.

Joseph Amato, equities chief investment officer at fund manager Neuberger Berman, argues that while the rest of the world is due some cyclical catch-up with the US, talk of a structural change in the global economic ecosystem is premature.

Amato says the short-term outperformance of US equities may fade, but the market’s long-term place as the world’s most important economy and stock market is intact.

He highlights the advantages that the US has over other countries, such as deep, liquid capital markets; a well-educated, flexible labour market; and an exceptional entrepreneurial and risk-taking culture.

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Amato says: “In US venture capital, for example, eight or nine failures are baked into investment expectations in order to find one or two future ‘unicorns.’ And those failures need not end careers in America. Some of the most successful founders have previously failed, often multiple times.

“By comparison, Europe offers a comparably sized consumer market, but a smaller and much more fragmented capital market and a less flexible labour market. China’s economy is still dependent on government-led investment over consumption and its capital markets are tightly controlled.”

Altogether, he says that this has enabled American workers, business owners and investors to take the risks necessary to adapt to fast-changing economic trends, such as the industrial assembly line in the early 20th century and the development of the internet a generation ago.

“Today, we think phenomena like the rise of artificial intelligence—and even the growing disruption to politics, geopolitics and global supply chains—make this exceptional American flexibility a bigger competitive advantage than ever before,” Amato concludes.

What other markets could benefit?

A weaker dollar, which may be held lower to boost exports, would be good news for emerging market shares, according to Ji Shi, a fund manager at L&G Asset Management.

She says: “Emerging market equities have historically tended to benefit from a weaker dollar; a weaker dollar has typically led to lower dollar returns and improved global liquidity, which in turn encouraged inflows into non-US investments.”

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She adds that a key argument for emerging market equities is global investors’ low allocations and a widened valuation gap compared to US equities after a continuous 15-year derating.

“If the logic of mean reversion applies, emerging market equities could potentially start to outperform amid a weakening dollar outlook. Indeed, although EM equities have outperformed year-to-date, the degree of this outperformance is low compared to historical periods of US dollar weakness,” she says.

Global with a low allocation to the US

Investors can avoid US shares, even when investing globally. Doing so would allow them to profit, or at least protect their portfolios better, if US exceptionalism was really ending.

The table below shows some global funds without much invested in the US, suggesting they are wary of the US market.

Source: Morningstar, 9 May 2025

Global funds with a high allocation to the US

On the other hand, many funds own more than the benchmark allocation to the US. If the US market does well, then so will these funds.

Source: Morningstar, 9 May 2025