Could U.S. investment leadership fade?

Globe and Mail

04-03-2025

What has defined world capital markets since the 2008 global financial crisis (GFC)? The remarkable dominance of U.S. equities. But history reminds us that market leadership is seldom permanent. Just look to Japan during the 1980s or the BRIC nations in the 2000s. Dominance isn't destiny.
Where to next for the U.S.? From 2009 onward, the U.S. benefited from substantial tailwinds: aggressive monetary easing led by the Fed, a competitive currency, and a relatively inexpensive stock market. It is a distant memory now, but for many years after the GFC the U.S was seen as one of the worst places in the world to invest. The nation was at the epicenter of the GFC with a reputation for fiscal mismanagement. Yet the S&P 500 produced a total return of nearly 600% over the last decade, fueled largely by stellar earnings from top tech companies – responsible for nearly half of those gains.
Today, global markets are concentrated in a single theme – U.S. Big Tech. Even though the U.S. share of global GDP declined from 32% in 2001 to 27% recently, its share values nevertheless now command a staggering 66% of the MSCI All-Country World index (from 30% in the early 1990s). Most asset allocators are now firmly committed to a structural U.S. equity overweight, assuming this positioning will continue to drive superior returns.
Catalysts that could lead to U.S. market re-rating
But what could change all this? The challenge with investment leadership changes is that old narratives take time to be replaced by new ones. People have a hard time giving up their investment paradigms when something has worked well for so long. But a few key catalysts could lead to a fundamental re-rating of the U.S. stock market. The first one is the sky-high bar for future earnings growth. Corporate America must deliver exceptional results to meet market expectations, leaving little room for error. Disappointments, even modest ones, could shake confidence and weigh heavily on valuations.
Second, the policy agenda of Donald Trump's second term will likely represent a sharp divergence from his first. U.S. economic outperformance has been bolstered by two key drivers: labour force expansion through robust immigration and, most importantly, fiscal expansion. These factors created a powerful tailwind for corporate profits, underpinned by a strong linkage between deficits and earnings. Higher deficits translated directly into higher profits, fueling market gains.
If Trump follows through on his current mandates, however, these pillars of growth could be dismantled. Policies aimed at reducing deficits and tightening immigration would suppress two critical engines of economic expansion. Elon Musk, now co-head of the Department of Government Efficiency (DOGE), promises to slash $2 trillion dollars in federal spending. Meanwhile, Treasury Secretary Scott Bessent pledges to cut the budget deficit to 3% by 2028. Both of these are solid long-term objectives, but they offer little immediate support for risk assets. The result could be a slowdown in U.S. growth, revealing the outsized role fiscal stimulus has played in driving U.S. market performance over the past decade.
Global markets regaining momentum
By contrast, many emerging markets and developed economies outside the U.S. are only in early stages of policy easing. Here, one cannot ignore China, where after more than three agonizing years of austerity, the policy paralysis has been broken and turned stimulative. Not many investors are buying it. But Xi Jinping has said the economy needs to be stabilized, whatever it takes. Reflect on Mario Draghi's similar declaration in 2012 – now seen as pivotal in ending the Euro crisis. Was it obvious at the time? Most weren't convinced, and EU leaders continued to stumble through summits. Only in hindsight did Draghi's words mark a turning point. China is following a similar path. A year from now, we will see today's seemingly small, disappointing measures as the start of a significant shift.
Looking ahead, the recovery that started in the U.S. will start to spread globally. Economic activity outside America is already firming, the cost of capital is falling, and many global markets, left behind over the last few years, are quietly gaining momentum. Even the perennially lagging Eurozone has fundamentals supporting the economy that are more solid than headlines suggest. Labour markets remain relatively robust. Consumers have shrugged off higher rates and wages are still outpacing inflation. And, most importantly, corporate profits are heading higher. This strength will continue to catch many by surprise. And it is the exact reason why global stock market rallies should continue to broaden and grind higher in the coming years.
Investment implications
Markets stand at a pivotal moment. While chasing U.S. technology giants may seem intuitive, history reminds us that the winners of one decade rarely lead the next. Elevated valuations and high expectations naturally dampen future returns. Meanwhile, the advancing global business cycle presents a compelling opportunity to move away from defensive U.S. growth stocks – historically strong in low-growth environments – toward higher-return prospects in undervalued global markets. W
ith the bull market broadening and investment leadership primed to shift, the case for diversification and the opportunity for global macro investing has rarely been greater. Informed, active management will be essential to navigating and capitalizing on the opportunities ahead.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. This article first appeared in Forstrong's 2025 Super Trends Report: Fifty Shades Of Greatness. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at [e-mail]. Follow Tyler on X at @TylerMordy and @ForstrongGlobal.
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