The End of U.S. Dominance: A New Era for Global Markets

The long era of U.S. outperformance in the global economy may be coming to an end. For years, the U.S. has been the undisputed leader in economic growth and financial markets, but recent developments suggest that this dominance may be waning. The rise of innovative AI models from non-U.S. companies, such as DeepSeek, and the outperformance of international stocks in 2025 are just a few of the indicators that suggest a shift in the global economic landscape.

One of the key indicators of this shift is the recent success of DeepSeek's new AI model. DeepSeek, a Chinese company, has developed a new AI model at a fraction of the cost of its American counterparts, which could potentially disrupt the market dominance of U.S. tech giants. This development is particularly noteworthy because it questions the exceptionalism of U.S. tech companies, which have traditionally enjoyed a valuation premium due to their innovative capabilities and market leadership.

The implications for the U.S. equity markets are multifaceted. On one hand, the success of DeepSeek and similar AI models could lead to a revaluation of U.S. tech stocks, as investors may seek out more cost-effective and innovative alternatives from non-U.S. companies. This could result in a shift in investment flows away from U.S. tech stocks and towards international equities, particularly those in the tech sector. For instance, as of February 19, 2025, global equities have returned 7.2% while the S&P 500 has returned 4.5%, indicating a growing investor interest in international stocks.

Moreover, the rise of DeepSeek and other innovative AI models could also spur competition and innovation within the U.S. tech industry, potentially leading to new breakthroughs and advancements. However, it could also create uncertainty and volatility in the U.S. equity markets, as investors reassess the competitive landscape and the long-term prospects of U.S. tech companies. As Fabio Bassi, head of Cross-Asset Strategy at J.P. Morgan, noted, "While U.S. exceptionalism has been a dominant theme for a while, it has, in our mind, more than one manifestation. We view the uncertainty around the sequencing and details of U.S. policies, as well as the evolution of the AI complex, as critical factors." This uncertainty could lead to a more cautious approach by investors, potentially impacting the overall performance of U.S. equity markets.

Another factor that could influence the future of U.S. exceptionalism is President Trump's second term policies, particularly tariffs and immigration restrictions. Tariffs are expected to create wider performance gaps in global growth, reinforcing U.S. exceptionalism in the short term. However, the long-term effects of these policies remain uncertain, and the rise of innovative companies in other countries could challenge U.S. dominance in certain sectors.

The data shows that international stocks have outperformed U.S. equities during certain periods, such as the 2000s, marked by the dot-com crash and the global financial crisis. During this time, China’s economic growth drove global equity returns while the S&P 500 lagged. Similarly, in the mid-1980s, international stocks gained over U.S. equities amid Japan’s rapid ascent. Adding to this, the 1985 Plaza Accord, a global agreement to weaken the U.S. dollar, led global currencies to rise significantly against the dollar.

Moreover, the data shows that international stocks have returned 7.2% to-date while the S&P 500 has returned 4.5% as of February 19, 2025. This is a significant difference and suggests that international stocks may continue to outperform U.S. equities in the coming years. Additionally, the data shows that the S&P 500 has averaged 13.8% in annualized returns while global stocks have averaged 4.9% over the past 10 years. This suggests that while U.S. stocks have outperformed in the past, there may be more room for growth in international stocks.

In conclusion, the long era of U.S. outperformance in the global economy may be coming to an end. The rise of innovative AI models from non-U.S. companies and the outperformance of international stocks in 2025 are just a few of the indicators that suggest a shift in the global economic landscape. While the U.S. may continue to dominate in certain sectors, it could face increased competition from other countries in the tech space. Investors should keep an eye on these developments and adjust their portfolios accordingly.