For years, immigration, federal stimulus, and a strong technology sector have driven U.S. growth. But with these tailwinds being reversed and new headwinds pushing back, some investors see the U.S. becoming less fertile ground for growth and risk assets.
Now, many are advising investors to take a defensive approach at home while seeking higher-risk opportunities abroad — particularly in undervalued overseas markets and private assets.
Xponance Founder and CEO Tina Byles Williams told Institutional Investor that she believes investors need to plan around the potential “end of U.S. exceptionalism.”
According to Byles Williams, this American exceptionalism with regard to growth and risk assets was driven primarily by three forces: immigrants contributing to 50 percent of the growth of labor, allowing the economy to grow in a less inflationary way; post-Covid stimulus money going to both consumers and companies; and strong technology earnings lifting all boats in the S&P 500.
But with the federal government imposing anti-immigrant and inflationary policies and stocks in the Magnificent Seven no longer being the guaranteed growth providers, Byles Williams asks: “what is left to remain an exception?"
Until the U.S. fixes its spending and debt trajectories, Byles Williams said bond investors will continue to play their historical role. Right now that means “keeping the ropes on the neck of policymakers at that four-and-a-half rate, which is not flattering to U.S. risk assets.” Not to mention an overvalued U.S. dollar could make assets less attractive to foreign investors while benefiting American investors allocating overseas.
“Neither Preordained nor Permanent”
“American exceptionalism was neither preordained nor permanent,” argued Harry Broadman, a former chief of staff of the President’s Council of Economic Advisers. According to Broadman, Trump’s misdirected international trade and investment policies could erode that perceived exceptionalism among investors, which would be extraordinarily difficult to reverse.
Having said that, he stressed the importance of evaluating the durability of the U.S. “by distinguishing between erosion that may be cyclical, and thus temporary, versus that which is secular and longer lasting.”
Cyclically, the U.S. still outperforms other economies, with stronger growth and delayed Fed rate cuts compared to other central banks. However, structural exceptionalism — long-term advantages like trade policies — is now in question due to tariffs and other factors.
And while growth managers like AllianceBernstein’s John Fogarty argue that “it’s too soon to say” whether trade policy uncertainty will impair earnings over the long term, AllianceBernstein’s co-CIO for U.S. growth equities and relative value is confident that the U.S. will continue to offer exceptional investment opportunities.
"The U.S. is home to a huge pool of profitable growth stocks, underpinning a powerful position that can’t be easily destroyed, even in a trade war,” Forgarty said.
While structural advantages like innovation, a large domestic market, and a high concentration of profitable growth companies remain intact, AB’s Fogarty argues that passive strategies may no longer suffice amid uncertainty. So, investors will need to take a more active investment approach.
With geopolitical uncertainty, fiscal risks, and deteriorating U.S. near-term growth in play, AllianceBernstein advises investors maintain a strategic overweight in U.S. equities, hedge their dollar exposure, and allocate to real assets, private assets, and gold.
Finding More Value in Overseas Markets
Despite the U.S. being “home to the highest-quality companies in the world,” Jackson Garton, CIO at Makena Capital Management, said that while investors have “been seeing more value in overseas markets” due to the “significant valuation gap that had been created over the last handful of years, particularly among the largest stocks.”
Uncertainty over fiscal policy, tariffs in particular, has also created “a bad setup for risk assets,” according to Garton. So, institutions are looking for risk assets outside the U.S. Plus, less foreign investment flows into U.S. assets will reduce the value of the dollar, make overseas assets more attractive and increase interest rates.
Garton highlighted the growing disparity between cap-weighted and equal-weighted indices in the U.S. market, noting that while the largest stocks like Amazon and Meta have driven much of the market’s performance, broader measures — such as equal-weighted indices — paint a less optimistic picture.
Byles Williams echoed this observation, pointing out that the U.S. appears far less compelling on an equal-weighted basis compared to the rest of the world, whereas cap-weighted indices still reflect the dominance of a few high-performing mega-caps.
With that as the backdrop, Byles Williams advised allocators to adopt a defensive stance in the U.S. market while deploying their risk budget overseas — particularly in private equity, cyclical sectors, industrials, and small caps. China and other emerging markets could present opportunities for growth and risk assets, especially if policy shifts (such as social safety nets to bolster consumption) materialize.
Garton added that “private markets still offer a ton of opportunities” as the public markets in the U.S. reprice.
Broadman, who worries “greatly about the direction and content of Trump’s misdirected international trade and investment policies and the global degradation of U.S. leadership,” added that the President’s “actions portend a secular decline in U.S. exceptionalism” that “will be extraordinarily difficult to right the ship again once it takes place.”
On the upside, the Xponance founder thinks these tax cuts and cuts to the labor market will lead to “a relief rally” where U.S. equities will outperform. “Five years from now, I think the risk premia on U.S. assets are really there,” she added.
