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The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’
Having tagged America’s inordinately large share of global financial markets as “the mother of all bubbles” in my last column, the main pushback I got, even from the few people who share my view, was that there is no sign this bubble will deflate any time soon.
Almost no one foresees an imminent pop. Virtually every Wall Street analyst predicts US stocks will continue outperforming the rest of the world in 2025. But all this enthusiasm only tends to confirm that the bubble is at a very advanced stage. If the consensus on “American exceptionalism” is so overwhelming, who is left to hop on the bandwagon and inflate it further?
The certainty of Wall Street has spilt over into the popular media, which often picks up on market trends only when they are well established and near an end. Hype for American superiority is now the stuff of TV, radio, podcasts, newspaper columns and magazine cover stories, which have a record of pointing the wrong way on future trends.
The bulls say America can remain dominant, owing to impressive earnings of the country’s corporations. But US earnings growth would not look so exceptional if not for the supernormal profits of its big tech firms, and massive government spending. Over time, supernormal profits get competed away. Growth and profits are also getting an artificial lift from the heaviest deficit spending ever recorded at this stage of an economic cycle, by far.
Most economists nonetheless argue that, with the balance sheets of US households and companies in good shape, the economic boom will endure. The few who worry about President-elect Donald Trump’s tariff or immigration plans tend to think they will hurt foreign economies more than the US.
But every hero has a fatal flaw. America’s is its sharply increasing addiction to government debt. My calculations suggest it now takes nearly $2 of new government debt to generate an additional $1 of US GDP growth — a 50 per cent increase on just five years ago. If any other country were spending this way, investors would be fleeing, but for now, they think America can get away with anything, as the world’s leading economy and issuer of the reserve currency.
More likely, by some point next year, investors will balk and demand higher interest rates or a demonstration of fiscal discipline, triggered perhaps by an even larger deficit or ever bigger auctions of Treasuries. Those demands will wean the US off its dependence on government spending, at least temporarily, and in turn undermine economic growth and corporate profits.
To be clear, this is a bubble in America’s performance relative to the rest of the world, not a 1990s-style mania in the US market. So, it can deflate in a benign way if the alternatives begin to look more attractive.
Maybe Germany and France will get their economic act together, as Greece and Spain did a decade ago when under duress. Maybe Beijing, under pressure from Trump tariffs and weak domestic demand, will finally boost consumption to stabilise the economy.
But, mesmerised by “American exceptionalism”, analysts can talk only of how the US has been the world’s premier market for a century. They forget that in six of the last 11 decades, the country’s stock market lagged behind the rest of the world, most recently in the 2000s when it delivered zero returns and emerging markets tripled in value. As that decade came to a close, the attitude in emerging markets echoed the certainty I hear about the US now: “Where else will the money go?”
The incredible outperformance relative to other countries could end if growth slows in the US, or picks up in other major powers, or for unforeseen reasons. That is often how bubbles end: unexpectedly. The two most recent manias in global markets were the commodities boom, which started bursting in 2011 on a surge of new supply, and the China growth bubble, which collapsed in 2021 amid a state crackdown on the property sector.
The longer a trend lasts, the more confident investors get, and the more indiscriminately they buy into the mania. In the late stages of a bubble, prices typically go parabolic, and over the past six months US stock prices have outgained others by the widest margin for any comparable period in at least a quarter century. When flying in such thin air, it doesn’t take much to stall the engines. All the classic signs of extreme prices, valuations and sentiment suggest the end is near. It’s time to bet against “American exceptionalism”.
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