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American exceptionalism in markets is starting to feel like a weird dream.
At the end of 2024, this was all any investor could talk about. It was deemed a nailed-on certainty that US stocks would continue and extend their ascent over the rest of the world, fuelled by a new president determined to deliver faster growth and by the country’s dominance in Big Tech.
Five months later, that narrative is in tatters. The main US stocks index, the S&P 500, is up on the year, just, after a wild, retail-driven recovery from a steep decline in April. Meanwhile, European indices have left the US for dust, with gains of 20-odd per cent in Italy and Germany and even more in Poland. Global funds that exclude US stocks are in demand.
Accepting that the American exceptionalism era may be over has been an uncomfortable process. “Our clients got very used to the state of the world for the past five years,” said Matt Gibson, head of the client sales group at Goldman Sachs Asset Management. “The US was a good trade for a long time. Now we get a lot of questions about whether that has run its course. Everybody is thinking about this. Some are acting.”
“Acting” can mean several things. Some investors are taking on hedges that pay out if US stocks take another knock. Some are similarly protecting themselves against more weakness in the dollar, which amplifies the damage from soggy stocks. Every investor I speak to these days is at least considering bulking up elsewhere in the coming years to push their US proportion lower.
This is all fine. Prudent risk management. But it is worth spending a little time asking how we got here. A new paper by Antti Ilmanen and Thomas Maloney at hedge fund AQR suggests the idea was about hope over reality all along. American exceptionalism fed on itself for years, to the point where investors treated it almost as a law of nature. Anyone who urged caution, or the spreading of bets more evenly around the world, was repeatedly proved wrong.
Some might use the B-word here: bubble. Ilmanen himself, an affable data wonk, is more circumspect. But in his words, “almost all the outperformance [in the US] has come from valuation changes. There was a growth advantage, but that was offset by other things. Markets don’t have long memories and they assume it’s going to be like this for ever.”
As the paper outlines, US markets stretched ahead of the rest of the world in the 1990s and for a decade and a half to 2024. That’s the bit that has stuck in investors’ minds, not the underperformance periods of the 2000s, 1980s and 1970s.
The stories we told ourselves about the good times revolved around an unmatched US entrepreneurial culture, market-friendly institutions and expectations for stronger economic growth. To be clear, earnings in the US have been great. But valuations have been greater. Add to the mix the rise and rise of index-hugging investors, clinging to benchmarks tilted towards corporate winners. Then add the active investors, who have been rewarding the same Big Tech stocks. Then mix in momentum — investors like winners and tend to reward stocks that have already performed well, helped further in the US by a robust dollar.
This all developed a force of its own that far exceeds fundamentals, sending the capitalisation of US Big Tech above that of the entire European market at the end of last year.
Valuations for the US were just half that of the rest of the world in the late 1980s, but by the end of last year they were almost twice as large. “Should investors in 2025 worry about the historically extreme relative US valuation? Yes,” the paper says. Crucially, Ilmanen thinks investors have “mistaken” inflated stock prices for “growth-driven” superiority.
The apparent turning point now visible in market performance could end up as a blip, but it is complacent, arrogant even, to dismiss the risk. It stems not just from the chaos of the economic policy and challenge to institutions now emanating from the White House but also the often-overlooked impact of China’s challenge to US dominance in artificial intelligence, which became clear with January’s release of DeepSeek. The protective moat around US Big Tech is not as wide nor as deep nor as shark-infested as the “new paradigm” narrative had assumed.
“What people take out of this evidence depends on how much they care about recent lived experience versus long-run patterns, or stories over statistics,” the AQR paper says. Stories have won for years, but the sudden outbreak of risk management and scrutiny from fund managers suggests the American exceptionalism fever is breaking.
katie.martin@ft.com
