The era of American stock market exceptionalism is over

Telegraph

19-04-2025

Nearly three quarters of fund managers think that US exceptionalism has peaked. The prevailing trend of the last decade – a belief in the continued success of US markets far beyond that of other regions – is over, according to the Bank of America's latest survey.
Over the past two months, fund managers have dumped US equities at a record pace as President Trump's tariff war and uncertainty over global economic stability continue. For those watching closely, it should not come as a shock, although it has happened perhaps a little faster than anticipated.
While it has come to feel like business as usual, US exceptionalism isn't the historic status quo. In the 1980s, for example, the rapid rise of Japanese stocks challenged the US dominance of global markets.
Tom Stevenson, investment director at Fidelity Personal Investing, explains that ultimately, the stock market bubble was over-inflated and had a long way to fall – a scenario today's US market is particularly vulnerable to.
One of the most notable pinpricks came at the start of this year with the release of DeepSeek, a sophisticated AI tool developed in China. The extremely cheap development cost of the model has sparked concerns that the AI moat of the American tech giants may not be as wide as had been assumed.
Since 2012, average earnings from US stocks have risen 145pc – over the same period, European and UK markets have each seen earnings increase by just 37pc and 30pc, respectively.
Hugh Gimber, global market strategist at JP Morgan, says: 'Technology has been the leading sector globally and the US has been overweight in that sector. In an environment where technology [stocks] have been standout it has been hard for other regions to out perform.'
However, the performance gap between the Magnificent Seven (Apple, Microsoft, Amazon, Alphabet, Tesla, Meta and Nvidia) and the rest of the S&P 500 has narrowed of late. A year ago, the tech giants were outgrowing the rest of the US market by 30pc, a figure that has plummeted to just 6pc. That is expected to halve to just 3pc in 2026.
The upset is apparent in other metrics, too. While the Magnificent Seven accounted for 50pc of the S&P 500's earnings in 2024, this share is projected to fall to a third for 2025.
All of this adds up to a simple fact: US equities are unlikely to outperform the rest of the world to the extent that they have done in the recent past.
In fact, Mr Stevenson warns they may underperform.
Markets are also becoming suspicious of US government debt, which could have dramatic consequences for the stock market.
Mr Gimber explains: 'One of the big parts behind the US economic outperformance is the size of the government deficit that has been running.
'This has been an expansion built on US government debt, and although levels are still rising the market is getting wary of US government debt, especially in the context of inflationary pressure from tariffs.'
By contrast, Europe and the UK are running smaller deficits relative to their economies and are increasing their commitments to defence spending, increasing fiscal stimulus.
Typically, when equities are struggling, money flocks to the dollar as a safe haven, but now even the greenback is under strain.
Jamie Mills O'Brien, investment director in European equities at Aberdeen, says: 'The dollar is not behaving like a safe haven currency in the way you would expect it to.
'Dollar weakening as equities are weakening points to a different way that asset allocators are viewing the market.'
Stevenson agrees: 'That is relevant for a UK based investor – if the US market is no longer outperforming and you have a drag from the currency, then that makes a case for lower exposure to US dollar-based assets.'
As a result, investors with global portfolios are likely to be looking to diversify further beyond the US than they have in a long time. The MSCI All Country World Index, a global equity index, is weighted 63pc to the US due to its exceptionalism. As that faith wavers, this appears risky.
Charles Sunnucks, portfolio manager in emerging market equities at Oldfield Partners, says: 'I don't think people understand how concentrated the world index is.
'Friends and family have been surprised by their level of exposure.'
So where do investors turn?
Investors are not entirely turning their backs on the US, but appear to be considering their options. Fund managers are now 36pc net underweight in US equities, the highest level in the past two years.
For managers in other regions, this is an opportunity.
Mr Sunnucks argues that while individual countries within emerging markets are at higher risk, a fund invested across these regions can capitalise on the fast-moving cycles that offer accelerated growth opportunities.
Investing across Europe, the Middle East and Africa (EMEA), for example, offers a more diversified pool of stock than the tech-heavy US.
Incidentally, the US may have built a rod for its own back, with the rise of AI making emerging economies more accessible than ever before.
As Mr Sunnucks notes, AI can remove language barriers and assist with the initial due diligence process, previously extremely cumbersome and potentially expensive tasks.
The current upheaval has also sparked interest in more familiar markets.
Mr Gimber argues there are positives to be found across the UK and Europe as a result of likely countermeasures to the current geopolitical environment.
An evolving policy mix in the US has fundamentally altered how European governments consider fiscal stimulus, while ongoing trade conversations provide a more optimistic outlook for investors and challenge the dominance of US growth.
Mr Mills O'Brien agrees: 'The fiscal prominence of the US is being challenged by the European economies with proposals for spending packages, while the US is contracting government spending.'
How should investors view the world in this new light? Mr Stevenson urges them to reconsider their allocation to the US.
The investment director suggests a 50pc exposure to US stocks is a currently prudent level, but warns anything lower would be a 'bold call'.
He says: 'The US may be facing challenges from China on the tech front but it still has such a dominant position in the industries of the future.
'I always say betting against the US is a really bold thing to do as an investor. It has rarely paid off.'