US ‘exceptionalism’ - resilient reality or risky illusion?

For over ten years, the US stock market has done better than almost all other major stock markets. A few big tech companies, like Meta, Google, and Microsoft, have largely driven this success.

The “Magnificent Seven” companies made up less than 7% of all US stock value in late 2014, by late 2024, they accounted for 28%[1]. In 2024 alone, these seven companies saw returns of 48%. The other 493 companies in the S&P 500 index returned about 16%. In comparison, global markets outside the US returned only about 5% (in US dollar terms)[2]. For investors who spread their money globally and have a good amount in the US, this has meant good returns over the past decade. This is certainly a positive outcome.

A Look Back: Not Always Exceptional

Some people now talk about “US exceptionalism.” This means they believe the US economy and its companies are uniquely strong and will stay that way compared to other markets.

However, this idea comes from a fairly short period. Many may forget what happened in the 2000s. After the dot-com bubble burst, the US stock market didn’t do well for ten years, often called the “lost decade.” It was far from “exceptional” then.

Looking back, many might wish they had invested more in US stocks over the last 15 years. But no one can truly predict the future. We can’t know if this strong period will continue, or for how long.

Figure 1: Recent Strong Performance vs. Past Weak Performance

What Investors See: Earnings and Prices

For investors, this idea of US exceptionalism shows up in two main ways:

1. Expected Earnings: How much profit companies are expected to make.

2. Price-to-Earnings (P/E) Ratio: How much investors are willing to pay for each dollar of those earnings.

US companies, especially in sectors like technology, have consistently reported high earnings. They often earn more than similar companies in other parts of the world. Because of this steady growth, investors have valued these companies more highly, leading to high and rising P/E ratios.

This steady increase in value may show more than just faith in future profits. It might also suggest a deeper, unstated belief in the strength of the US economy itself. It’s hard to tell if this belief is truly justified or just an illusion.

Figure 2: P/E Ratios Today vs. 20-Year Average (to 27/3/2025)

Source: Major Stock Index PE Ratios accessed on 28th May 2025.

Will US Stocks Stay on Top?

Looking ahead, several big issues could challenge the continued strength of the US market:

Global Tensions: Problems between countries are growing.
US Isolationism: A possible move by the US to pull back from global affairs, especially under a second Trump government, creates uncertainty.
Government Debt: Huge government deficits and a national debt now over $37 trillion pose risks.
Competition: Other countries, like China, are strongly competing in areas such as AI, chip making, and electric vehicles.
US Dollar: The world depends on the US dollar. This could change in the future.

While there’s no real alternative to the dollar right now, the so called “exorbitant privilege” is still very important. This term means the unique benefits the US enjoys due to the dollar’s dominance. This status helps keep interest rates low, makes it cheaper for companies to borrow money, and draws foreign investment into US financial markets. However, even this advantage isn’t safe from global changes or challenges from other nations.

Believe It or Not?

The future is very unclear. Many things could happen, and people have different ideas about what’s most likely. Luckily, for individual investors who trust that markets are generally smart, we can rely on what the market as a whole tells us. The market takes in all these different scenarios, risks, and possibilities. It then turns them into one simple number: the price of each stock and, overall, the price of the entire market.

Because of this, smart investors get their own kind of “special advantage.” Instead of trying to guess if US exceptionalism will continue, we can take a neutral approach. This means we don’t put too much or too little into US stocks based on short-term stories. This neutral stance reflects the combined knowledge and expectations of everyone in the market.

In the end, by not trying to “time” the market (a strategy that usually doesn’t work well, based on studies) and by staying diversified with well-designed, low-cost investment funds, investors have a better chance of good results. This careful way of investing can lead to your own “exceptional returns,” often quietly doing better than many active, opinion-based investment strategies over the long term.

General Investment Risk Warnings

Please remember the value of your investments and any income from them can go down as well as up and you may get back less than the amount you originally invested. All investments carry an element of risk which may differ significantly.

If you are unsure as to the suitability of any particular investment or product, you should seek professional financial advice. Tax rules may change in the future and taxation will depend on your personal circumstances. Charges may be subject to change in the future.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Portfolio performance data are for illustrative, educational purposes only and do not represent live client portfolios.

Asset Classes Used

Asset class	Data series
US equities	Fama/French US Large Cap Research Index
World ex-US equities	Fama/French International Market Index
Emerging market equities	Fama/French Emerging Markets Index

[1] https://siblisresearch.com/data/us-stock-market-value/ accessed on 28^th May 2025

[2] ‘Mag 7 Gravity’, By Wes Crill, PhD, Kevin Green, PhD 01 April 2025 see www.dimensional.com accessed on 28^th May 2025