American exceptionalism in the market is beginning to feel like a strange dream.
By the end of 2024, that's what all investors can talk about. It is believed that U.S. stock will continue and expand its rise in the rest of the world, driven by the new president, a new president's determination to achieve faster growth and the country's dominance in large-scale technology fields.
Five months later, the narrative fell into rags. The major U.S. stock index (S&P 500) has recovered only after a huge decline in April, after a retail-driven recovery. Meanwhile, the European index has plunged the United States into dust, with Italy and Germany growing by 20%, increasing in Poland. Excluding global funding needs for U.S. stocks.
It is an uncomfortable process to accept that the era of American exceptionalism may have ended. "Our customers have been very used to the situation of the world for the last five years," said Matt Gibson, head of the client sales group at Goldman Sachs Asset Management. "For a long time, the United States has been a good deal. Now, we have a lot of questions about whether this is going on. Everyone is thinking about that. Some are acting."
"Show" can mean several things. If U.S. stocks ring again, some investors are taking hedging. Some people can also protect themselves from more weaknesses in the dollar, thus amplifying the losses of wet stocks. Every investor I talk to these days is at least considering breeding elsewhere in the coming years to reduce their U.S. percentage.
It's all good. Prudent risk management. But it's worth taking a little time to ask how we get here. A new paper by Antti Ilmanen and Thomas Maloney of hedge fund AQR suggests that the idea is about the hope of reality. American exceptionalism has been nurtured for so many years that investors see it as a natural law. Anyone who urges to be cautious, or spreads bets more smoothly around the world, has repeatedly proven to be wrong.
Some people may use the B word here: bubbles. Ilmanna himself is affable data, more cautious. But in his words: "Almost all performance (in the United States) comes from changes in valuation. It's a growth advantage, but it's offset by something else. The market has no long-term memories, and they think it will be forever."
As the newspaper outlined, the U.S. market has been stretching in the 1990s and the rest of the world from 10 and a half years to 2024.
The stories we tell about the good times are centered around an unparalleled culture of entrepreneurs, market-friendly institutions, and expectations for stronger economic growth. To be clear, the income in the United States is great. But the valuation is even greater. Coupled with the rise and rise of indexes embracing investors, sticking to the benchmark that tends toward company winners. Then add active investors who have been rewarding the same big tech stocks. Then join the momentum - Investors like winners, tend to reward stocks that have performed well, provide further assistance in the U.S. with a strong dollar.
All of this has produced its own strength, far exceeding the fundamentals, and at the end of last year it has capitalized large-scale American technologies higher than capital in the entire European market.
In the late 1980s, the United States was only half as valuable as the rest of the world, but by the end of last year, their large numbers were almost twice as high. "In 2025, should investors worry about historically extreme U.S. valuations? Yes." Crucially, Ilmanen believes that investors' "wrong" stock prices will "grow into drivers" superior.
The obvious turning point now visible in market performance may end up being a bondage, but both complacent and arrogantly avoid this risk. It stems not only from the chaos of economic policies and challenges of institutions issued now from the White House, but also from China’s impact on the challenges of the U.S. dominance in artificial intelligence, which became clear after the release of DeepSeek in January. The protection moat around us is not as wide as sharks, not as wide or as deep as the narrative of the “new paradigm”.
"What people get from this evidence depends on how much they care about recent life experiences with long-term patterns or statistics stories," the AQR paper says. The story has won years of victory, but the sudden outbreak of risk management and scrutiny by fund managers suggests that the American exceptionalist fever is breaking down.
katie.martin@ft.com