The US has been the centre of the global economy and stock investing for decades, so much so that it has come to seem unassailable. But is US exceptionalism coming towards an end?
The latest fund flow data from the Investment Association shows retail investors put £948 million into North American-focused equity funds during April, while taking £817 million out of UK equity funds, even as the tariff fallout pushed the value of US equities downwards.
Those investors “willing to take on more risk have been… buying the dip as valuations have fallen”, says Miranda Seath, director of market insight at the Investment Association.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
If the markets go back to normal, then that buying will look like a shrewd move. But is that going to happen?
US stocks have been dominant in global investing for so long that it starts to feel inevitable; that there is something hard-wired into American companies that means they are destined to outperform their global counterparts.
After all, the US economy is the biggest in the world, right? Well, yes – but if that’s the basis on which investors should allocate, then US stocks are already hugely overvalued. The US accounted for 27.7% of global GDP in 2024, but its companies account for around half of the global stock market.
In other words, US equities are nearly twice as expensive as they ought to be based on the country’s share of global GDP. The numbers look even worse when looking at global trackers like the MSCI World Index, which is currently weighted 71.4% towards the US.
But the events of 2025 to date have given a hint that the concept of US exceptionalism could be under threat. While the S&P 500 plummeted during April’s tariff chaos, European markets soared, with the DAX hitting several new all-time highs during May.
“It’s too early to call the end of US exceptionalism,” wrote Derren Nathan, head of equity research at Hargreaves Lansdown, “but there are signs that investors are looking to diversify.”
What is US exceptionalism?
In general terms, the meaning of the phrase “US exceptionalism” usually refers to a prevailing belief that the US is qualitatively distinct from (and superior to) other nations.
This view draws on popular tropes from American history – think the ‘American dream’ – and ascribes intangible qualities to the US and its citizens, like superior work ethics.
In turn those feed into a more economically-driven version of US exceptionalism which views the US economy as fundamentally superior to others. Proponents might argue that Americans are inherently more productive, or that US institutions and laws make its economy fundamentally more competitive.
It’s an easy doctrine to subscribe to, even subconsciously, given the hugely dominant role the US plays in the global economy.
But it leads to some skewed behaviour, particularly in financial markets. Rob Perrone, investment specialist at Orbis Investments, points out that US stocks trade at approximately 22 times earnings, compared to around 15 times earnings in other parts of the world.
“Who woke up last year thinking they’d get rich off European stocks? No-one!” said Perrone. “Who woke up last year thinking they’d get rich off American stocks? Lots of people, and the enthusiasm of past buyers is already in the price.”
Is US exceptionalism coming to an end?
Given the shocks that have occurred to the US economy and its stock market so far this year, many have begun to question whether the concept of US exceptionalism itself is under threat.
“The US market’s performance over much of the first five months of the year has been far from exceptional,” said William Marshall, chief investment officer at Hymans Robertson Investment Services.
The big shocks to the US stock market that have emerged this year have all challenged different aspects of US exceptionalism.
The emergence of DeepSeek, for example, sent the S&P 500 down 1.5% in a single session because it struck right at the heart of the idea that the US was the global centre of technological innovation and that its companies had a de facto monopoly over the development of artificial intelligence (AI).
Donald Trump’s tariff regime is an interesting case in point. While erecting tariff barriers with its trade partners could theoretically cut the US out of the globalised system that has seen its wealth balloon over the past century, the tariffs themselves can be understood as a symptom, rather than a cause, of the unravelling of US exceptionalism.
They are Trump’s attempt to reduce increasingly unsustainable levels of US government debt. The nonpartisan Congressional Budget Office estimated last week that tariffs could reduce this debt pile by $2.8 trillion if they remain in place.
Obviously, it is government spending that has allowed the country’s debt to grow so large, but the predicament for the Trump administration is that reversing this trend could hurt the very economy, and companies, that benefitted from it in the first place.
“Milton Freidman likened inflation to alcoholism, and the same is true of debt: fun while you’re spending, a nauseous headache when you stop,” said Perrone. “US companies have benefitted enormously from the US government’s debt-fuelled spending binge. The US has run war-level deficits in peacetime, cut taxes into an already-expanding economy, and spent on everything from stimmy checks to chip subsidies.”
It is unsurprising then that markets are reacting strongly to attempts to reverse this.
“At times this year, US stocks, bonds, and the dollar were all down at the same time. That is the behaviour you expect from an emerging market. It is not what you expect from the world’s pre-eminent stock market, definitive risk-free asset, and global reserve currency,” said Perrone.
It is also noteworthy that while US stocks have since recovered to above their levels on Liberation Day, US bonds and the dollar haven’t. “Equity investors, (people paid to be bullish all day), remain confident, but bond and currency investors, (people paid to worry all day) are more circumspect,” said Perrone. “Confidence in the US has diminished.”
How to invest for the end of US exceptionalism
If you do believe that the era of US exceptionalism is over, there are some steps you can take in order to protect your portfolio.
The US market’s challenging start to the year “has provided investors with a useful reminder of some investment basics”, said Marshall. These include understanding that equities are volatile, that this volatility is driven by sentiment, and that global diversification can help investors.
Perrone recommends the UK and Japan as potentially undervalued markets to diversify into.
“The UK is home to plenty of cheap stocks and good companies with high dividend yields,” he said. “Many of these companies do the bulk of their business elsewhere, yet trade at an enormous discount to their US-listed peers.”
Perrone says Japan “offers both reasonably valued stocks and a deeply undervalued currency”.
Marshall doesn’t necessarily think it’s time to sell US stocks. “We are global investors at heart and this, plus our desire for diversification, means we will continue to hold US assets in our portfolios,” he said.
Alternatively, European investment trusts could be set for growth with the continent on the verge of an economic upturn, according to some experts.
What Santander’s takeover of TSB means for customers
How to find active fund managers that are worth paying for
