Rumors of U.S. market exceptionalism’s impending demise are greatly exaggerated

Dave Gilreath: ©Sheaff Brock Investment Advisors

In recent months, a debate has arisen over whether the long-running global dominance of the U.S. stock market, known in the industry as American exceptionalism, is beginning to wane.

This moniker is apparently derived from writings about the U.S. by Alexis de Tocqueville, a prominent 19^th-century French political philosopher. Generally, it refers to the globally unique advantages and opportunities fostered by American democracy and capitalism.

These advantages have resulted in the most lucrative stock market on the planet, with returns so globally superior for so long that doubting its staying power is almost like questioning whether the cliff swallows will return to Mission San Juan Capistrano in the spring, or whether Apple will ever come out with a new iPhone.

Negative market voices act as though the drivers of the American market’s exceptionalism—a growth-prone economy, states’ authority to independently seek economic development and a federal tax structure that’s overwhelmingly biased toward capital investment—had suddenly vanished.

Decades of dominance

But that’s what they’re doing, despite the American market’s stellar history. For decades, the U.S. market has been so exceptional that it has prompted investors around the globe to forgo their own sovereign markets and send their money here. As of 2024, about 20% of the U.S. market was foreign money.

It’s curious that this debate is even taking place, as various powerful factors that have long driven the U.S. market haven’t ebbed. To paraphrase Mark Twain’s famous statement in response to false reports that he had died, rumors of American exceptionalism’s demise are greatly exaggerated.

The debate, fueled by a convergence of events and short-term trends, reignited in the spring. The initial trigger was President Trump’s April announcement of unexpectedly steep tariffs on foreign exports, which pushed the U.S. market downward.

Though European indexes also declined sharply, European stocks were (and still are) having their best year in a long time. In a rare occurrence, they outstripped the returns of the U.S. market early this year.

A narrow slice

But this is an extremely narrow slice of time. Longer-term, the U.S. market has chalked up a remarkably superior global record.

As of 2022, except for a handful of years—primarily, the period of the Great Recession and the accompanying bear market, from 2007 to 2009—U.S. stocks had outperformed internationals every year over the previous 33. And for the 10-year period ended October 31, 2022, returns in the U.S. market outpaced those in foreign countries by 100%, returning 222% to investors. No other country came close.

In the post-pandemic period from 2022 until early this year, the American market’s relative global outperformance was even more pronounced. As of mid-June, the U.S. bull market born from the pandemic bear had gained 97%, compared with 66% for Europe.

And now, the U.S. market has completely recovered from this year’s decline. In early July, both the Nasdaq and the S&P 500 hit all-time highs.

The endurance of the U.S. market’s outperformance flies in the face of the standard myopic financial-planning recommendation for international equity diversification. Given the last few decades, following this prescription has only made average equity portfolio returns far worse than those invested exclusively in U.S. stocks.

Sure, markets in other nations will sometimes outperform the U.S. Yet, as history amply demonstrates, the odds of foreign outperformance great and long enough to justify substantial international diversification are quite low. That’s why I call it “deworsification.”

Regarding U.S. government debt, there was speculation aplenty in April that foreign investors would soon be dumping Treasury securities. Yet, data cited by Rep. Tim Moore, a Republican from North Carolina, at a House hearing June 24 shows that in April, foreign holdings of Treasurys edged close to a record high.

In June, foreign investment in U.S. Treasurys in general was at long-term average levels, and in the 30-year, unexpectedly strong.

Angst over the dollar

Exceptionalism skeptics fret over the decline this year in the strength of the dollar against foreign currencies, particularly the euro. But again, this is a short-lived development.

It’s important to keep in mind that currency markets are constantly in flux. The dollar was much stronger against the euro from 2022 until this year, and hit a seven-year high against it in late 2022/early 2023.

Some of those concerned about the dollar’s valuation misguidedly believe this may signal the end of its status as the world’s reserve currency (the one that central banks of nations around the world like to hold in large quantities to stabilize their economies).

However, being the reserve currency doesn’t mean that the dollar needs to be the strongest at any given time. Historically, this hasn’t always been the case.

During the dollar’s nearly 100-year tenure as the world’s reserve currency, its valuation has declined below others’ at various points, notes Rudchir Sharma, author of “The Rise and Fall of Nations,”a book about global forces of economic change. For example, he adds, in recent years the world’s strongest currency has not been the dollar but the Swiss franc.

BlackRock portfolio manager Russell Brownback told Bloomberg viewers June 26 that the end of the dollar’s reserve status is no more likely than “taking 200 countries off the metric system. It’s not going to happen because [this status] is so embedded” in the functions of central banks in so many nations.

Curiously, the absence of any real dings to the factors buttressing American exceptionalism has done little to forestall commentary prophesying its decline.

Different voices, different views

Joseph G. Carson, former director of global economic research at Alliance Bernstein, asserts on the Haver Analytics website that American exceptionalism is in irrevocable decline. And perma-bears such as DoubleLine CEO Jeffrey Gundlach are recommending that investors gird their portfolios for a presumed prolonged decline in American equities by loading now up on foreign stocks.

Yet Joseph V. Amato, president and chief investment officer for equities at Neuberger Berman, writes on his prestigious firm’s website that such decidedly negative prognoses “are premature.”

So premature as to be alarmist.

Money always flows to where it’s treated the best, and the U.S. market’s reputation for being such a good host to cash isn’t going to change overnight.

Warren Buffett has long maintained, “Never bet against America,” and this advice is worth remembering at times like the present.

The U.S. market’s exceptionalism will continue because:

• America’s society, culture, government and civil justice system are the world’s most supportive of entrepreneurialism, public investment and property rights.
• The American economy has an irrepressible tendency to spawn huge, enormously profitable companies—currently, 25 of the world’s 30 largest.
• America’s undisputed leadership in the digital revolution will continue to drive economic productivity and stock market growth. Having started with the formation of companies like Apple and Microsoft in the 1980s and 1990s, this revolution is turning out to be the most economically consequential ever.
• The chief pursuit of such behemoths currently is artificial intelligence, the most powerful stock market driver for the past couple years and widely expected to remain so indefinitely; American exceptionalism is driving AI.

The AI-development trend is so strong that it has apparently played a role in converting one of the best-known market/economic skeptics to a more optimistic view.

Dr. Doom’s conversion

Known as Dr. Doom because of his long history of negative outlooks, economist Nouriel Roubini is one of the last people you’d expect to find defending the vitality of American exceptionalism.

But that’s where he has now landed. Roubini, a widely known consultant and professor emeritus at NYU’s Stern School of Business, is predicting a strong near-term economy with declining recession risk and a robust stock market driven by tech companies and their focus on AI. 

It's unclear why Roubini is realizing the power of the digital revolution just now. Perhaps it’s because this power is gaining significant momentum as digital innovations build on each other — and, with AI’s machine learning, grow autonomously.

Of course, the digital revolution started and continues from the visionary work of humans, many of them first- or second-generation Americans, or immigrants attracted to the U.S. as the best country for starting their businesses because it consistently rewards entrepreneurialism and taxes profits less.

In this sense, American exceptionalism is self-sustaining. It’s not going away.

Dave Sheaff Gilreath, CFP,^® is a Partner Advisor at Sheaff Brock Investment Advisors powered by Allworth Financial LP, an investment advisory firm registered with the SEC. Investments mentioned in this article may be held by Allworth Financial, affiliates or related persons.