With the Trump administration’s political and economic policies shocking many around the world, some strategists are pondering if American exceptionalism is at risk.
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U.S. exceptionalism is the belief among investors and businesses that the country is unique and superior to others. This idea bolsters its economy.
Predictability and the rule of law have given the U.S. this “edge,” according to Mohamed El-Erian, president of Queens’ College in Cambridge and chief economic advisor at Allianz, but he worries that it is being “eroded.”
“The more these two things are questioned, the more that people are going to start questioning U.S. exceptionalism,” he told Bloomberg last month. He stopped short of announcing the death of U.S. exceptionalism, but said it is “under enormous pressure."
When President Donald Trump was elected in November, investors were betting on his policies like tax cuts to spur economic growth and boost U.S. stocks.
But an on-again-off-again trade war, along with an “aggressive posture toward Ukraine and a wave of Elon Musk-driven government cuts,” are instead undermining sentiment, according to BNN Bloomberg, which noted that the “Trump bump is now the Trump slump.”
The dollar has been weakened. The U.S. stock market is also lagging behind the rest of the world this year. U.S.-listed international stock ETFs saw inflows of $13 billion in March and $28 billion in the first quarter, according to Morningstar. "Europe-stock category jumped off the page in the first quarter. It reeled in $5.7 billion in March — its best month in exactly 10 years — to cap off an $8 billion first quarter."
“There’s been an enormous upending of all the consensus trades that were in place at the beginning of the year,” El-Erian told Bloomberg. “All those trades have been turned on their heads.”
Questioning American exceptionalism
Back in November, Oxford Economics remained optimistic that U.S. exceptionalism would continue in 2025, noting that it’s not the first time the economy “has dealt with elevated uncertainty” and that businesses would be able to “quickly adapt.”
With “the prospects for expansionary fiscal policy on top of an already solid backdrop for U.S. consumer spending and investment, the U.S. economy will likely further distance itself from the rest of the pack,” it noted.
Fast-forward a couple of months, and a lot has changed. U.S. CEO confidence plummeted in March, according to one survey, and the Trump administration’s gyrating tariff threats was the most commonly cited reason for declining optimism. U.S. consumer confidence has also tumbled. The Federal Reserve has lowered its gross domestic product (GDP) growth forecast for this year to 1.7% from 2.1%. Strategists at Morgan Stanley and Goldman Sachs downgraded GDP growth forecasts for the U.S. in 2025 over tariff concerns.
Citi strategists are saying U.S. exceptionalism has “paused” under the Trump administration. Not only has the bank downgraded U.S. stocks to “neutral,” it has upgraded Chinese stocks to “overweight,” and recommends taking profits in U.S. stocks to invest in Chinese companies.
J.P Morgan’s chief economist Bruce Kasman told Reuters the country’s standing as an investment destination and its “exorbitant privilege” are at risk of lasting damage if the administration undermines trust in U.S. governance.
El-Erian also told Bloomberg that there’s hope for a “Sputnik moment” in Germany, as the country shifts fiscal policy to support a surge of spending on defense and infrastructure.
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How can investors make sure they’re well diversified?
This may be a good time to make sure your portfolio is diversified geographically.
Vanguard, for example, recommends having 20% of your portfolio invested in international stocks and bonds, but “to get the full diversification benefits, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.”
One of the easier ways to gain broad exposure to international assets is ETFs. You have a choice of investing in developed markets (which would include the U.K., France and Japan) or emerging markets, like China, India and Mexico. Since emerging markets tend to be more volatile, Vanguard recommends “that you don’t overweight your allocation to emerging markets.”
When it comes to buying foreign stocks, ETFs are often a better choice than mutual funds, according to Forbes, since “ETFs are very portable from one brokerage account to another” and they’re “better at tax time.”
You’ll want to do your research or talk to your adviser about the potential risks involved such as market risk and liquidity, as well as costs, fees and tax issues. There are a number of ETF providers to choose from, including iShares by BlackRock, Vanguard, Charles Schwab, Invesco, WisdomTree and VanEck, among many others.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
