Hong Hon, Manager, Global Equities, Lonsec
Investors have had little reason to question US exceptionalism.
For years, US equities have outperformed most global markets, supported by deep capital markets, superior earnings growth, world-leading technology companies and an economy that has repeatedly defied the most pessimistic forecasts. From the Global Financial Crisis to the recent AI-driven rally, the US has become the destination of choice for global investors.
Yet the increasingly concentrated market leadership and widening valuation gap raises an important question – is US exceptionalism reaching its limits, or is it merely pausing before the next period of outperformance?
The case for continued dominance remains compelling: the world’s largest technology companies are overwhelmingly based in the US and sits at the centre of AI innovation, attracting venture capital, talent and research spending. Corporate profitability in the US also exceeds most global markets, while the flexible economy helps companies quickly adapt to technological and economic changes.
Many structural advantages in the US also remain intact – relatively favourable demographics, abundant energy, a world-class university system and capital markets that efficiently fund innovation. Few global markets combine these strengths at a comparable scale.
However, investors should be cautious about extrapolating this success into the future.
Valuation remains a major challenge. US equities trade at a historically elevated premium to global peers. Superior growth and profitability may justify some of the premium, but expectations will eventually become difficult to meet, let alone exceed. Even if earnings continue to grow, future returns may be constrained by the higher starting valuations that already reflect optimistic outcomes.
Market concentration is another risk. A small group of mega-cap technology companies accounts for much of the US market and recent gains. While these businesses may possess genuine competitive advantages, impacts from slower earnings growth, tighter regulation or unexpected disruption could have an outsized effect on the overall market.
Meanwhile, opportunities outside of the US are becoming increasingly attractive.
Europe is home to many globally competitive companies in industrial automation, luxury goods, healthcare and advanced manufacturing. Japan’s governance reforms, shareholder-friendly capital allocation and improving returns on equity are unlocking long-overlooked value. In Emerging Markets, India continues to benefit from favourable demographics, infrastructure investment and deeper participation in global supply chains.
More generally, the changing global economy may also support a broadening in market leadership. Companies are diversifying supply chains and manufacturing investment is spreading across Asia, LATAM and Eastern Europe. Electrification, energy security, defence spending and infrastructure modernisation are creating opportunities in sectors where US dominance is less pronounced.
Geopolitics is also reinforcing this shift. In an increasingly multi-polar world, economic influence is becoming more dispersed, industrial policy is having a greater impact on corporate growth and governments are seeking greater independence in critical industries. This should favour regional champions and produce a more balanced distribution of investment opportunities.
Importantly, none of this implies the abandoning of US equities. The US remains home to many of the world’s most innovative and profitable companies, and predictions of its decline have previously proved costly.
A more applicable question is whether US exceptionalism is becoming less absolute. Over the past decade, investors have generated strong returns by owning a handful of US growth companies. The next decade may require a broader approach if valuation gaps narrow, market leadership widens or economic powers become more geographically dispersed. Investors may need to consider other markets and sectors.
The bottom line is that US exceptionalism is unlikely to disappear anytime soon, but the conditions behind extraordinary outperformance may be changing. For global equities investors, the choice will not be simply between the US and rest of the world. Rather, it is recognising that a more balanced market environment could create opportunities beyond the winners of the past decade.
In that scenario, the end of US exceptionalism may be less a threat, and mark the return of a more diversified opportunity set for global investors.
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