US Exceptionalism: A Double-Edged Sword

The US economy and markets have been on a tear for the past decade, with the S&P 500's total return outpacing MSCI Europe and the FTSE 100 by a wide margin. This outperformance has not been limited to the equity market, with higher interest rates on bonds also attracting capital from regions with low or negative interest rates. As global capital flowed to the US, it put upward pressure on the dollar's value, and many asset allocators remain committed to a structural overweight in US assets despite their valuations compared to the rest of the world reaching rarely seen levels.

The US's exceptional performance can be attributed to several factors, including faster nominal GDP and earnings growth, larger margin expansion, and a rise in valuations. The country's favorable business environment, fiscal stimulus, and dominance in megacap tech have also contributed to this trend. However, it is essential to question some of the underpinnings of American exceptionalism and be cautious about being too overweight on last decade's story.

First, if US companies are more profitable or faster growing, and markets are efficient, then that should already be reflected in the price and not create further excess returns. Second, the US has also been exceptional in less compelling ways, such as its explosion in government debt, which has far outpaced Europe's. This debt increase has boosted spending and corporate earnings but may not be sustainable in the long term. Third, the US has seen an expansion of profit margins, which may not be repeatable as workers become increasingly agitated and demand higher pay. Finally, the US's concentration in tech stocks, which account for 40% of the S&P 500's returns since 2010, raises concerns about a potential correction if the AI theme loses luster or if AI products are not in demand from the broader corporate universe.



As capital flows to new opportunities elsewhere, this could also weaken the dollar. To be clear, the US is not about to experience a decade of stunning underperformance. However, investors should question some of the underpinnings of American exceptionalism and be cautious about being too overweight on last decade's story. Those who have not rebalanced their portfolios may find themselves with a significant overweight in US assets, which could be a cause for concern.



In conclusion, while the US economy and markets have had an extraordinary run over the past decade, investors should be aware of the potential risks and limitations of this approach. The high valuations of US stocks, particularly in the technology sector, and the US's concentration in tech stocks raise concerns about a potential correction. Additionally, the US's rapid increase in government debt and the expansion of profit margins may not be sustainable in the long term. Investors should consider rebalancing their portfolios to address the significant overweight in US assets and be prepared to adjust their positions if catalysts for a reversal in US exceptionalism emerge.