The hangover is setting in. American exceptionalism—that intoxicating belief in the perpetual dominance of U.S. markets—appears to be hitting its limit. At least that's what three-quarters of fund managers think, according to Bank of America's latest pulse-check of the money-moving crowd.
Over just the past two months, I've watched fund managers dump U.S. equities faster than New Yorkers evacuating the Hamptons after Labor Day. This great unwinding? It's happening even faster than the pessimists predicted. Trump's tariff threats certainly haven't helped matters, nor has the general sense that—let's be honest—nobody really has a clue what's happening with the global economy anymore.
Here's the thing though. American market domination isn't actually the historical norm, despite how natural it's felt lately. Remember the 1980s? Japanese stocks were absolutely crushing it, challenging U.S. supremacy until their bubble burst catastrophically. A lesson we apparently need to relearn every few decades.
Several tiny pinpricks have punctured the American market ego recently. Take China's DeepSeek AI model—developed for pennies on the dollar compared to U.S. tech giants' expenditures. That protective moat around American tech dominance? Turns out it might be more puddle than ocean.
The numbers tell quite a story. Since 2012, U.S. stocks have enjoyed a staggering 145% earnings growth. European and UK markets? They've limped along at 37% and 30% respectively. That's not just winning—that's lapping your competition while they're still struggling through the first mile.
But why such dramatic outperformance?
"It's essentially a sector allocation story," explained Hugh Gimber at JP Morgan when I spoke with him last week. The U.S. market is heavily weighted toward tech, and tech has been the market's golden child. When your portfolio is stuffed with winning lottery tickets, of course you'll outperform markets buying scratch-offs.
What's really concerning for the exceptionalism believers (and I've talked to plenty over the years) is how the gap between the Magnificent Seven tech titans and the rest of the S&P 500 has narrowed dramatically. Just a year ago, these tech behemoths were outgrowing the rest of the market by a whopping 30%. Now? A meager 6%. And projections show that shrinking to just 3% by 2026.
Good lord—when the Magnificent Seven's contribution to S&P 500 earnings is expected to drop from 50% to merely a third next year, shouldn't we be questioning the whole narrative?
The other worry keeping analysts up at night is America's ballooning government debt. As Gimber pointed out (while nervously eyeing his Bloomberg terminal), much of America's economic outperformance has been built on government borrowing. It's like bragging about your amazing lifestyle while conveniently forgetting to mention it's all funded by maxed-out credit cards. At some point, someone's gonna ask about repayment plans.
And don't get me started on the inflationary pressure from tariffs. Rising inflation plus massive government debt? That's a toxic cocktail that would make even the most iron-stomached Wall Street veteran queasy.
So where does this leave us?
U.S. equities probably won't continue their dominance. In fact—and this might sound heretical after the past decade—they might actually underperform for a while. What a plot twist that would be!
Look, American exceptionalism isn't dead... it's just nursing a hangover after a decade-long bender. Like any recovery period, there'll be reckoning, regret, and recalibration before normal service resumes. The real question is whether this is just a brief timeout or the start of a new market reality where American dominance isn't automatically assumed.
Having covered market cycles since the early 2000s, I've seen this movie before. Mean reversion is one of the few certainties in financial markets. And America has been exceptional for... well, an exceptionally long time.
Maybe it's time global investors looked beyond U.S. borders for the next round of opportunities. The bar's open elsewhere, and those drinks might taste surprisingly good.
