Managing exceptionalism
The concept of US exceptionalism is facing scrutiny. Policy uncertainty has added to the recent market volatility.
Throughout history, US exceptionalism has been a significant theme in financial markets. However, this concept is facing scrutiny in 2025.
According to the Global Investment Returns Yearbook 2025, an investment of one dollar in US equities in 1900 would have grown to USD 2,911 in real (after inflation) terms by the end of 2024, compared to USD 194 for ex-US equities over the same period. From 2020 to 2024, US equities (MSCI USA) outperformed ex-US equities (MSCI AC World ex-US) by 72 percentage points, driven by a post-pandemic boom that saw nominal US GDP rise roughly 35% alongside strong corporate earnings growth and rapid technological advances.
Yet, US equities have underperformed ex-US equities by around 15 percentage points year to date. The US dollar and US Treasuries have deviated from historical patterns and declined amid recent volatility. The relative steepening of the US Treasury yield curve indicates that investors are demanding an additional risk premium on longer-term US government debt.
On the economic front, trade tariffs are expected to affect the US more significantly than most other global economies. Additional restrictions may limit the operations of US multinational companies globally. Beyond tariffs, Europe and China appear to be better positioned to provide monetary and fiscal stimulus, given the US deficit and central bank policy complications caused by tariff-driven inflation.
At the same time, the many innovative companies present in the US equity market are likely to remain a key driver of global profit growth in the years ahead. A well-diversified global portfolio should still include substantial exposure to the world’s largest economy and most developed financial market. And nearer term, we see scope for a tactical recovery in US risk assets, as has often been the case historically following periods of high volatility and investor pessimism.
In the remainder of this letter, I consider the risks to US exceptionalism, why we believe US assets should nonetheless remain at the core of well-diversified global portfolios, and how investors can balance the risks and opportunities currently present in US assets.
Changes in the global landscape should be a time for investors to pause, take stock, and consider their asset allocations. In short, we believe investors who entered 2025 underexposed to US stocks should use the recent sell-off to progressively build strategic exposure, while those with outsized exposure should look at global diversification opportunities.
To manage near-term volatility, we believe that investors should take advantage of attractive yields on US quality bonds to lock in durable income, while also considering diversifying to include gold, hedge funds, and other global fixed income markets. Finally, though the US dollar looks oversold in the near term, we believe investors should prepare to reduce US dollar exposure (including by hedging USD assets) in the event of near-term rallies, to improve the long-term risk-return profile of portfolios.
