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Wall Street’s “American exceptionalism” trade has been shattered in recent weeks as mounting political uncertainty over Donald Trump’s tariffs, the economic outlook and geopolitics have fuelled an unusually prolonged and deep twin sell-off in the US dollar and equities.
The greenback has lost 4 per cent against a basket of six peers so far this year, while the blue-chip S&P 500 has tumbled almost 4 per cent.
Such large and persistent falls in Wall Street stocks and the currency are unusual, with these types of episodes occurring only a handful of times over the past 25 years, according to research by investment bank Goldman Sachs. The declines mark a reversal from recent years, when bets that America’s economy would outperform peers triggered a clamour for US financial assets at the expense of other major markets.
“Growing doubts in recent weeks on the sustainability of US exceptionalism sparked one of the fastest US equity market corrections since the early 1970s,” Goldman Sachs told clients this week, adding that “while equity market corrections are historically not that uncommon, a coincident dollar sell-off is — especially when equities rapidly reprice”.
The recent ructions for both US stocks and the dollar come as Trump’s escalating trade war has shaken global financial markets and sparked concerns about the trajectory of the world’s biggest economy. The Federal Reserve on Wednesday slashed its growth forecast and lifted its inflation outlook, citing tariffs for a significant portion of the downgrade.
Until this year, Wall Street stocks had dominated global markets — buoyed by expectations that the US economy would continue to grow at a faster pace than its rivals. MSCI’s index of US equities soared 54 per cent from 2023 to 2024, while the index provider’s gauge of global developed market stocks excluding the US rose 17 per cent in dollar terms, according to FactSet data.
In the immediate aftermath of Trump’s election victory last November, equities roared even higher, while the dollar leapt on bets that pro-business policies would boost growth, while tariffs would ultimately prove to be more measured than the president-elect had threatened.
But those bets have rapidly unravelled since Trump’s inauguration in January, with the president launching steep tariffs on imports from big trading partners including Mexico, Canada and China, and threatened more to come — driving Wall Street banks to question how long American assets can outperform.
“US exceptionalism — the defining macro trade theme of this cycle — has waned to start the year and is dragging the [dollar] lower,” currency strategists at JPMorgan noted this week, adding that “we have turned outright bearish [on the dollar] for the first time in four years”.
JPMorgan’s strategists highlighted “uncertain tariff delivery” and “softening in US activity that is more acute and front-loaded than expected” among reasons for their pessimism about the dollar, while also pointing to a “watershed moment in German-European fiscal and geopolitics” — referring to a recent proposal by the German government to bolster military and infrastructure spending.
So far this year, the MSCI World index, excluding the US, has risen almost 9 per cent, while the index provider’s US gauge has fallen nearly 4 per cent.
Global asset managers have also turned more negative on US equities this year, intensifying the debate about the future of American exceptionalism.
Scott Chan, chief investment officer of the $353bn California State Teachers’ Retirement System, said in a recent investment committee meeting that the “astounding amount of executive orders” from Trump had caused “a tremendous amount of uncertainty in the marketplace”. He added: “The potential risks here are unprecedented. They are world changing.”
Other strategists pointed to flows into international equities as evidence of investors actively varying their portfolios beyond US shores.
“It appears that market participants are starting to look elsewhere outside of the dollar or starting to diversify their dollar holdings into other markets and currencies,” said Bob Michele, head of global fixed income at JPMorgan Asset Management. “The broader markets are telling us that it looks like dollar exceptionalism has peaked.”
Still, economists and analysts emphasised that the US’s economic future remained uncertain and that they were not dead set on the probability of a protracted slowdown.
Cash has flooded into the Treasury market this year, in a fresh signal of the haven status still attributed to dollar assets. But the bulk of those inflows have poured into short-term government bonds rather than longer-dated Treasuries — something analysts said highlights a lack of conviction about the direction of US growth.
Eric Winograd, chief economist at AllianceBernstein, said “markets are absolutely questioning” the viability of American exceptionalism, but that it was “premature to conclude” that this distinctive reputation was “over”.
“I still think trade policy in particular pushes us towards America being hurt relatively less than other countries,” he added, noting that concerns over growth so far had been fuelled by sentiment surveys more than hard data. “Now we’ve gotta see the facts — we have to see the evidence, and that’s going to take time,” he said.
Still, Winograd added, “the magnitude of the exceptionalism you might expect has probably declined a little bit”.
Data visualisation by Eva Xiao. Additional reporting by Sun Yu
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