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The author serves as chair of Rockefeller International. His latest publication is ‘What Went Wrong With Capitalism’
A significant number of those who celebrated Donald Trump’s election as a major advancement for “American exceptionalism” are now interpreting the recent dip in US stocks and the dollar as evidence that this period of US supremacy is in jeopardy. They link this unexpected downturn to Trump as well. They seem to believe that without the constant upheavals in Washington, US markets would be soaring ahead of the global competition.
The inflated notion of American exceptionalism, however, has been brewing long before Trump’s second term. After years of growth in global markets, it displayed classic signs of reaching its peak following his election, when many were convinced that the new administration’s strategies would draw even more investments into the US. Yet such irrational optimism was destined to collapse under the first sharp sting. Whether it was the chaos of Trump’s early tenure or another shock, investors were bound to reassess their historically high investments in US assets.
Even after the recent declines, the actual value of the dollar is still at levels not seen frequently since the end of fixed exchange rates in the early 1970s. Additionally, the S&P 500 has dropped less than 10 percent from its peak in February and continues to trade 25 percent above its upward trend line from the past 150 years.
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In spite of the notable surge in European and Chinese stocks this year, US stocks are still assessed at a 50 percent premium over international markets — close to the highest spreads on record. The United States maintains over 60 percent of the primary global market benchmark, while its share of global GDP remains below 30 percent.
In summary, the long-awaited recalibration of global markets has just commenced, and it is likely to continue for quite some time.
From the news reports, one might assume that investors are challenging US dominance solely due to Trump’s tariffs and the significant ambiguity surrounding his policies. However, the hype surrounding American exceptionalism was fundamentally based on robust US economic growth, which was artificially spurred by extensive government spending and an unprecedented surge in capital investment in artificial intelligence. The US economy has never been this reliant on government, and maintaining budget deficits of 6 percent was not viable. Concurrently, recent fiscal reforms in Germany, along with the introduction of low-cost AI models in China, indicate that other global players can indeed compete with the United States.
Up until now, the exodus from US equities has been largely initiated by the fast-money segment, including hedge funds. Many investors have yet to join this trend. Even as sentiment among consumers and small businesses continues to wane, American retail investors persist in buying the dips. They have injected funds into US stocks daily (with just one exception) since prices peaked late last month, often utilizing the most aggressive investment instruments available, such as leveraged ETFs.
Foreign investors, ranging from Australian pension funds to Japanese insurance firms, are also continuing to invest in the US. In recent years, over 80 percent of the capital flowing into global stock market funds has been directed towards the US. Having increased their American equity investments to $20 trillion over the past decade, foreign investors now hold 30 percent of the US stock market, a record level.
Given their optimistic perspectives on the dollar, these investors have scarcely hedged their risks, leaving the US currency more exposed than ever. For decades, the country has maintained a substantial international investment deficit, which indicates that Americans possess far fewer assets abroad compared to what foreigners own in the US. At the start of this decade, that deficit exceeded 50 percent of US GDP, a threshold that historically has often indicated potential currency decline. Currently, the deficit is even more pronounced, at 80 percent of GDP, with other developed economies generally running surpluses.
Historically, global stocks tended to perform well when the US market was thriving, and poorly during US downturns. This correlation has weakened in recent times, as the excitement surrounding America drained capital and vitality from other markets. This disconnect remains evident, but now the US is experiencing declines while few other nations are also facing setbacks.
European stock markets recently witnessed their highest influx of foreign investments in a decade. Japan is also gaining attention from investors. Emerging markets are no longer declining in sync with the US market. As concerns about US economic and market supremacy infiltrate the broader investment community globally, the allure of American exceptionalism will likely continue to diminish. It may be hard to fathom, but many of the underlying dynamics at play are even larger than Trump.
