The notion that the United States of America is exceptional has existed for a long time. Historians would cite its absence of European feudalism; religious scholars would point to the puritan roots of its early settlers and political scientists would talk about the importance of its tradition of republicanism and the rights of the individual.
Modern day share market investors have also adopted US exceptionalism as an explanation for elevated earnings multiples on listed companies. This support comes from three pillars. Firstly, technological superiority in the digital arena, secondly fierce competition (including in the labour market) that keeps inflation under control and allows the central bank to respond swiftly to growth slowdowns and finally, a de-facto reserve currency that enables the country to borrow at attractive long-term interest rates.
US dominance in global markets
Thanks to these influences the market capitalisation of the US share market has grown so much that the MSCI All Country World Index (which contains around two and a half thousand companies from 47 countries) has around 64% in the US, nearly thirteen times the next largest country, Japan.
Furthermore, the top nine companies in that index are US firms and just these few account for 21% of the global allocation. This is a degree of concentration that has not existed for 50 years.
Debating the future of US exceptionalism
Sceptics would argue that the pillars of US exceptionalism are now being undermined. Firstly, the release of DeepSeek by a Chinese artificial intelligence company sent shock waves through the IT industry. Secondly, stubborn inflation and political pressure on the Federal Reserve calls into question the expectations of low and stable interest rates. Finally, bond market vigilantes are concerned that the US has abused its reserve currency privilege to run unsustainable government deficits and now faces a reckoning as its annual interest costs grow to exceed even defence spending.
Supporters of continued exceptionalism would highlight that US firms remain the most competitive in the world and have formidable economic moats, meaning they enjoy handsome margins and accumulate significant cashflows. They argue these are global enterprises that serve customers all over the world and do not rely solely on favourable policy settings in their home country.
Rethinking the home bias
US-based investors don’t typically invest far beyond their shores and recent studies estimate that the home country portion of their share portfolios could be as high as 81%. While this has worked out very well, many are now looking at international diversification options. Indeed, all investors should be asking themselves whether they want to allocate new money to the global market in the same skewed proportions as they have in recent years.
Rising alternatives to the US
Legendary investor, Warren Buffet, has been increasing his investment in Japanese trading companies. Japan is progressing well on corporate governance improvements and unravelling the problematic cross shareholdings between companies that have stymied action in the past. The authorities have not yet declared an end to the era of deflation but three years of inflation above 2% suggests that the tide has turned in the broader economy.
In Europe, the need to ramp up defence spending, replace capital goods and meet demand from consumers is driving the strongest surge in industrial production in five years. European companies linked to these industries led European share market indices to outpace US indices by a wide margin in the first quarter of this year.
Emerging economies make up almost half the number of countries in the global index but only 12% of its weighting. History has seen several decade-long cycles in the performance of emerging markets relative to developed markets that are often related to trends in the US dollar.
The most recent long period of weakness in the US dollar from 2001 till 2011 corresponded with a double digit per annum outperformance by emerging market equities. But after lagging for the past fourteen years, price to earnings multiples on emerging markets are now just above half the level of the US market.
Some of these economies may be the drivers of demand in the years ahead. Fittingly, during New Zealand’s Fieldays® week, tractor maker Deere & Co forecast that Brazil could be their second biggest market in five years’ time.
Global growth still means America gains
This brings us full circle, because if growth outside the United States begins to accelerate, then many of the multi-national companies that stand to benefit will be US-based. Factset’s Geographic Revenue Exposure analysis shows that S&P 500 energy, technology, consumer staples and material sectors generate more than 40% of their revenue from outside the USA.
One of Warren Buffet’s most quoted aphorisms is "Don’t bet against America”. While diversification is important, there is no need to sell some of history’s most successful companies just because of where they are domiciled. It is possible that positioning for peak exceptionalism may come down to stock picking skills rather than geographic asset allocation.
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This article was originally published in the NBR on 17 June 2025 (paywalled).
