Did U.S. Stock Market Share Just Peak?
'U.S. exceptionalism' may have hit its highest level late last year, with U.S. stocks drifting lower as a share of global markets. Here's what that could mean going forward.
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Did we just reach the peak for the “American exceptionalism” trade?
It appears likely that U.S. equities hit their all-time peak share of the MSCI All Country World Index at the end of last year. On December 24, to be precise, when U.S. equities made up 67.2% of the index, as Christopher Wood notes in his latest Greed & Fear report.
Since then, the U.S. share has slipped to 63.7% as of the end of last month. The dip has come as the All Countries World ex-U.S. index has broken out of a trading range that it had held since 2007, Wood, the global head of equity strategy at Jefferies, points out.
This breakout “does not mean that the American stock market has to collapse,” Wood explains. Considering the U.S. economy makes up 26.4% of global economic output, a share of 67% means U.S. markets punch way above their weight. “But it does suggest that the U.S. dollar has entered a long-term downtrend.”
Weak Dollar One Cause
There are a few reasons to bet on the continued weakening of the U.S. dollar, making overseas markets relatively more attractive. The "One Big Beautiful Bill Act" now wending its way through Congress has alarmed the bond markets and, with its unfunded tax cuts, points to a further increase in the federal deficit. The unpredictability of U.S. tariff policy also eats into the dollar’s safe-haven status. And it appears that U.S. President Donald Trump ultimately favors and will push policies that ensure a weaker greenback.
Meanwhile Asian currencies look best placed to strengthen. The trends are essentially the opposite of what occurred during the Asian Financial Crisis close to 30 years ago, Wood notes. Trump’s mercantilism looks to maximize exports and minimize imports. And Asia has the savings to back stronger currencies, with gross national savings running at 39% of Gross Domestic Product for emerging Asia, per IMF data, compared with 20.1% for the developed G7 nations, and just 17.3% for the United States.
What’s the upshot? Well, we see Moody’s downgrade U.S. sovereign debt, although that decision last Friday perhaps didn’t move markets as much as you might expect. Moody’s was, after all, joining moves that Standard & Poor’s and Fitch had already made.
Bond Market Bust
It has also led to waning interest in U.S. Treasuries, as manifested by the weak sale of $16 billion in 20-year T-bills on Wednesday. Those bonds priced at a record 5.047% since traders barely showed up for the auction. We saw a brief stock selloff in what’s normally a pretty staid part of the bond market, with 20-year Treasuries typically garnering far less attention than either 10-year or 30-year durations.
I’m of the mind that we’re more likely to see U.S. equities sell off again than run further up toward their mid-February all-time high. I agree with CLSA chief equity strategist Alexander Redman, who says U.S. stock investors are being “astronomically complacent” about the amount of damage the U.S. trade war will inflict on corporate earnings.
“Real damage was done to corporate and household sentiment during the period that the tariffs were being applied,” Redman tells Bloomberg in an interview. He notes that capital-expenditure intentions for U.S. companies have turned negative for only the fourth time this century, while consumer sentiment is also at a multi-decade low.
Tariff Tumult Mounts Again
And we’re now around halfway through the 90-day pause on Trump’s “reciprocal” tariffs announced on April 2 with his crazy chart. The trade “deals” that have been done, for instance in the case of the United Kingdom, essentially simply agreed to keep tariffs at 10% for a longer term. Other countries will see tariffs leap again bar U.S. intervention by early July.
And 10% is far higher than they have been. The effective U.S. tariff rate over the past 30 years through 2024 has been just 1.8%, economist Stephen Roach points out. So we have a roughly 450% increase in trade taxes, a rate well in excess of the disastrous 47% tariff increase from the Smoot-Hawley Tariff Act that precipitated the Great Depression.
We have seen Japan Inc. estimate the impact of a higher U.S. freight. The 100 largest Japanese companies by market capitalization have estimated that their earnings are going to take a hit as high as ¥4 trillion (US$27.6 billion), as per a Financial Times tally of their warnings during earnings season. And that total could rise. Some companies refused to revise earnings expectations citing “extreme uncertainty.”
Toyota Motor TM bit the bullet by forecasting its net profit will fall from ¥4.8 trillion (US$34.1 billion) in the year through March to ¥3.1 trillion (US$21.6 billion) for the year ending March 2026. Tariffs directly cost ¥180 billion (US$1.3 billion) in April and May alone, and the U.S. dollar weakness eats into profits when repatriated to Japan. Honda Motor HMC expects a ¥650 billion (US$4.6 billion) hit to fiscal 2026 profits from tariffs around the world.
Stocks have run higher in May thanks to an easing of trade tensions. Today’s developments are setting us back on that course of uncertainty once again. There’s the threat to target Apple AAPL with a tariff of 25% on iPhones that aren’t made inside the United States – it’s not clear tariffs can be directed at a specific company, but it looks like Trump will try – while the European Union is threatened with tariffs of as much as 50% starting June 1.
Stocks are heading south as a result. It looks like that peak U.S. share of global markets has passed.
At the time of publication, McMillan was long AAPL.
