Investors have called into question the concept of so-called ‘US exceptionalism’ that has seen US equities to outperform the rest of the world for the past few years.
After Trump’s tariff announcements shocked global markets and caused an abrupt pricing-in of the economic impact of widespread tariffs, other regions and currencies outside of the US have started to outperform.
“Despite recent challenges to the notion of US Exceptionalism, I remain most bullish on US stocks,” said Peter Bates, portfolio manager for the Global Select Equity Strategy at T. Rowe Price.
“The US stock market undeniably stands out due to its free-market structure, liquidity, robust financial regulations, and transparency.”
“Coupled with a strong education and judicial system, these foundations protect innovation — allowing great ideas to be patented and turned into thriving businesses.”
He argued that the above strengths remain intact despite Trump’s recent tariff policies.
However, high tariffs can indeed influence the economy over time. This is why markets, which are forward-looking, may be preparing for a different economic reality.
But Bates said the key question is whether tariffs policies, and the reactions from other global countries, will disrupt current economic momentum.
“While some disruptions like tariffs are in place, overall developed economies should remain resilient,” he said. “Major market crises typically stem from financial instability, which we do not currently see.”
He added: “While short-term valuation premiums may fluctuate, there is little structural evidence that other developed economies will outpace the US over the next several years.”
Strong economic fundamentals
While dramatic changes in US policies may be initially shocking, Bates believes “it’s important to separate the economy from politics”.
“Currently, developed markets are performing well: banks are healthy with excess capital, credit conditions are stable, and most regions have near full employment supporting strong consumer spending,” he said.
“About 90% of the S&P 500 reported Q1 earnings, showing average revenue and EPS growth of 5% and 14%, well above consensus estimates of 7% EPS growth. Early Q2 data, including credit card spending and jobless claims, also look solid.”
One area Bates is concerned about however is the persistent US deficit which has most recently exceeded 6% of gross domestic product (GDP).
“If this raises doubts about US creditworthiness, it could push 10-year yields above 5%, pressuring equity valuations,” Bates warned. “While 4.5% yields are manageable, yields at 5% or higher would challenge the justification for a 20x earnings multiple for US equity, effectively eroding the equity risk premium.”
However, he said that while the US deficit may be concerning, it does not undermine “the core systems underpinning its exceptionalism”, in his view.
“While excellent companies exist globally, the US’s foundational pillars are more likely to sustain attractive long-term opportunities,” he said.
