Beyond US exceptionalism: where now for equities?

Is the era of US exceptionalism coming to an end? It’s an unsettling proposition for equity investors, who have long benefited from a seemingly unstoppable wave of US equity market returns and the strength of the USD. What could this mean for equity investors in 2025? 

What US exceptionalism is depends on who you’re asking. To most people, the term captures a sense of unassailable US leadership across multiple interlinked dimensions, such as geopolitics, military might, economic growth, fiscal spending, rule of law, technology and AI, and equity returns. As equity investors, we see US exceptionalism as the consistent outperformance of US equity markets relative to global counterparts. A shift in any of the dimensions that constitute US exceptionalism is likely to challenge many of the assumptions that have supported the US dollar’s dominance, creating implications for not only currency considerations and Treasuries, but also US equities. 

Liberation Day marked a turning point, but regime change was already underway 

It might feel like this narrative has only been questioned in recent months — particularly in the wake of Liberation Day — but we see Trump’s tariff announcements as the clearest signal yet of a shift that has already been underway for nearly a decade. The prior economic regime of expanding globalization was characterized by synchronized global growth, low dispersion, low inflation, and falling interest rates — an era that began with the fall of the Berlin Wall, accelerated with NAFTA in 1994, and arguably peaked with the formation of the euro in 2000 and China’s entry into the World Trade Organization in 2001. In a highly synchronized environment, investors were incentivized to reduce diversification and concentrate exposure into whichever asset class was delivering the best growth. Throughout this period, and especially since the global financial crisis (GFC), growth leadership was consistently led by the US, particularly its large-cap tech sector — a perception only bolstered by a consistently strengthening US dollar. 

But the first cracks in this “Goldilocks” regime began to appear as early as 2015 – 2016. We saw a growth scare and capital flight out of China in the second half of 2015, Brexit in June 2016, a rise in populism, including the election of US President Trump in November 2016, and the onset of US-China tariffs in 2018.

While the disruption caused by the pandemic obscured this picture, each of these events signaled a shift from globalization as a rising tide that lifted all boats to a more zero-sum, domestically reoriented world. We’ve seen this shift in elections across the US, UK, Germany, France, and Poland, where establishment parties have lost ground to anti-establishment movements that feel left behind by globalization. We’ve also seen the policy response increasingly shift from monetary to fiscal in an attempt to try and address these concerns. 

President Trump’s Liberation Day was the clearest evidence yet that the US is overhauling its role on the global stage. In a “blink and you will miss it” whirlwind (Figure 1), US equities plummeted then rebounded following Trump’s tariff announcements on April 2. A US recession was priced in, then out, of markets, leaving investor confidence fragile. In the wake of the tariffs, the market seems to be gripped by two opposing forces: short-term panic and long-term optimism. A key concern now is that the market overreacts to immediate risks while underplaying the potential for deeper long-term challenges. 

What does this mean for US equities? 

Regime change and the actions of Trump 2.0 start to prompt questions around the durability of aspects of US exceptionalism, especially those related to geopolitics, fiscal spending, rule of law, and the treatment of foreign capital. The implications of this are yet to be fully understood but the most obvious consequence of reduced US exceptionalism is likely to be a weaker US dollar, with implications for all USD assets but more significant ones for currency and bond yields than equities. That said, a weaker dollar does have direct implications for exposures to US equities and certainly for how non-US investors think about their net returns and currency hedging. 

The simple fact that we are transitioning away from an era of high synchronization and tight correlations has significant implications for investors in terms of both opportunity set and risk management. Keeping all one’s eggs in a US basket seems imprudent given the broader context. Many portfolios remain heavily concentrated in US equities and dollar-denominated assets, a reflection of capital finding its way to wherever it has historically been treated best. However, investors must now ask: How is that capital being treated now, and how might it be treated in the future?

None of this necessarily means that US large-cap tech companies are any less exceptional, but a shift toward lower correlations and heightened volatility means that diversification starts to matter again. Over the past decade, if you were heavily invested in US equities, diversification — and hedging the US dollar — would have been net detractors. That’s no longer likely to be the case, given that country correlations are now at a multi-decade low (Figure 2).