The United States has long had the most advanced capital markets in the world, giving it significant influence over the global economy.
Speaking just a month ago at the SEC’s International Institute for Securities Market Growth and Development in Washington, Commissioner Hester Peirce addressed both how best to maintain this dominance and why the number of public companies listed on U.S. exchanges continues to fall.
“The U.S. capital markets are well-developed and well-functioning, but keeping them preeminent requires continued care and creativity,” she said. “Here in the United States, we are constantly asking ourselves how we can do better and watching for signs that something may be amiss in the markets or the way we regulate them.”
But recent government actions are spooking investors and asset managers — posing a potential threat to the robustness of the capital markets.
Even as tariffs remain a threat to the economy, Section 899 of the One Big Beautiful Bill Act — passed by the House but not yet the Senate — is adding a whole new headache. Referred to as a “revenge tax” or “retaliation tax,” the proposal is designed to punish certain countries whose tax policies the U.S. government considers unfair.
Investors will pay a tax up to a maximum of 20 percent on investments in non-U.S. companies held directly or in a fund, starting at five percent. The amount would increase annually, with the intent of pressuring the targeted country to repeal its tax laws.
Asset management sources familiar with the proposal say the looming threat of additional tax burdens could discourage foreign investors from entering U.S. capital markets altogether. It could even jeopardize the dollar’s standing as the global reserve currency —something asset managers like T. Rowe Price have already warned about.
Under the proposal, if France were to impose a tax on a U.S. company like Google, and the U.S. deemed it discriminatory, then under this law, a retaliatory tax could be levied on French capital invested in U.S. assets. That could hinder the massive capital flows the U.S. has long benefited from—both into Treasuries and the broader market.
Sources say that taxing foreign investors for entering U.S. markets is bad for both U.S. and international asset managers.
Ben Huneke, head of Morgan Stanley Investment Management, said: “While the Section 899 provision in the reconciliation bill is written in the spirit of protecting U.S. business interests overseas, it could have the unintended consequence of a retreat by foreign investors from U.S. markets that have historically benefited from significant net capital inflows.”
The proposal is also forcing asset managers to rethink their strategies.
Michael Arone, chief investment strategist at State Street Global Advisors, said: “The reshaping of the global security framework and trading system — with Section 899 specifically — means the appetite for dollars seems to be diminishing.”
“Meanwhile, the Trump administration continues to signal that it’s becoming just a bit more difficult to do business here. It fuels interest in international and all-weather portfolios, real assets, and gold as ways to diversify away from the dollar,” he added.
SSGA is recommending that “investors who maybe haven’t owned international or emerging market stocks in a while to begin increasing those allocations. I’m not saying they should go actively overweight, but if you’re underweight relative to the global benchmark, it may be time to start buying at the margin.”
He pointed to high-quality international tech, aerospace, and defense companies as potential options. Further undermining the U.S. equity markets.
This tax approach is counter-intuitive to the overarching desire to maintain the biggest and most robust capital market in the world, according to Arone, who said that risking overseas investment is like “playing with fire.” The ramifications for the U.S. economy are potentially enormous.
“Where I think the logic falls down, or becomes a bit naive, is that they want to have their cake and eat it too. They want to do those things without giving up the benefits that we get from having the dollar be the world's reserve currency, while keeping interest rates and inflation low, and the dollar strong. We're seeing it play out in real time. It is a risk to markets going forward, which is why we're suggesting investors make a few changes around the edges.”
The Security Paradox
Initially, the industry's reaction to Section 899 focused on foreign investors and the increased expenses they would incur, as well as the U.S. administration's retaliation against certain tax provisions, such as the OECD's under-taxed profits rule. But some sources argue that the proposal reflects a deeper structural realignment of financial responsibilities in the global arena.
The proposal is another mark of the U.S.'s ideological shift away from its role as the global default provider of capital and security, particularly when it comes to NATO and the defense of Europe.
Mabrouk Chetouane, Paris-based head of global market strategy at Natixis Investment Managers, called the actions inconsistent at best and confusing at worst. At a time when U.S. deficit funding from abroad is vital, other countries are being forced to redirect capital internally to cover gaps left by U.S. retrenchment.
“In Europe, we have to ensure our own security because Trump said he will not continue to do so alone,” he said. “But if we have to completely pay for our own security, we cannot also fund the U.S. deficit. It is a paradox.”
The investment environment isn’t as clear as it once was. Chetouane noted that nobody used to complain about U.S. concentration, but now it’s being questioned. Natixis isn’t exiting U.S. equities or making drastic changes, he said, but the firm is seriously reevaluating its bond market position due to heightened volatility.
To make matters worse, the proposed tax could have a material impact on U.S.-based asset managers and investors. One ripple effect: existing bond agreements often include gross-up clauses requiring borrowers to cover any taxes imposed so that lenders still receive the same net interest. This means borrowers could absorb higher costs on grandfathered deals and future agreements may shift the burden to lenders.
This would raise borrowing costs. And while it could push borrowers toward U.S. lenders instead of foreign ones, the overall increase in capital cost is a concern.
Remmelt Reigersman, partner at Mayer Brown, said: “What will foreign capital providers do in this situation? Will they reallocate outside the U.S., shrinking the capital pool? Or will they stay and suffer a withholding tax, taking credits in their own jurisdiction?”
He also floated a rarely discussed possibility: that targeted countries could revise the tax laws that triggered U.S. retaliation in the first place.
Whether the proposal survives Congress remains to be seen. But the backlash this past week suggests it may be altered. Either way, eyes are turning toward Europe—and if Blackstone CEO Steve Schwarzman’s plan to invest over half a trillion dollars in Europe over the next decade is any indication, this is not just a short-term pivot, regardless of how the political winds shift.
