Is “American Exceptionalism” in Question?

Diverging Markets Tell Different Stories

“American exceptionalism” is the concept that the United States is distinctive or unique in relation to other nations, and that the U.S. is obligated to play a special role in global politics. Financial markets in the U.S. have historically been viewed as the most sound and safest markets in the world, given the U.S.’s founding ideologies, democratic government, and regulatory systems. But today, this is coming into question.

The Federal Reserve Act of 1913 created the Federal Reserve Bank to support and stabilize the U.S. currency system – the first U.S. dollars were printed in 1914. The U.S. dollar replaced gold to become the official reserve currency of the world in 1944 after the signing of the Bretton Woods Agreement.^[1] In World War II, the U.S. supplied weapons and goods to many countries in exchange for gold, making the U.S. the majority owner of gold by the end of the war. A return to the gold standard was nearly impossible following the war, and the 44 countries that signed the Bretton Woods Agreement decided that the world’s currencies would be pegged to the U.S. dollar.

Fast forward to today, and nearly 58% of global foreign exchange reserves are held in the U.S. dollar. The Euro is in second with a 20% share; no other currency comes close to surpassing the U.S. dollar’s dominance. The security and clarity of the U.S. economy relative to other nations have supported the use of the U.S. dollar around the world.

Chart 1: The U.S. Dollar Accounts for Nearly 60% of Foreign Exchange Reserves^[2]

To be clear, we do not believe American exceptionalism is dead. We have no doubt.  But let us explore why there are some that do believe this to be the case. Ultimately, we want to buy America on this weakness – and we have been in both of our fixed income and equity portfolios. 

So, why is the downfall of American exceptionalism in question today? The instability of the U.S. political environment has resulted in a rotation out of U.S.-denominated assets. The S&P 500, U.S. Treasury bonds, and the U.S. dollar are all in decline – a correlation only seen in a few instances during the Great Financial Crisis. Typically, U.S. Treasuries and the U.S dollar decline pari passu during risk-on periods with flows going into U.S. equity markets, but this time, U.S. stocks have declined at the same time. Paired with the record inflows and price of gold, it appears that a new “safe haven” asset may be in use today.

Chart 2: The U.S. Dollar and 10-Year Treasury Yield are Diverging^[3]

In historical instances of global fear and instability, U.S. Treasuries and the dollar rise because U.S. assets have been viewed as a shelter. This has not been the case today as all U.S. assets are declining in tandem with one another. But one asset class remains as investors’ preferred choice: gold. This week, gold hit a new all-time high at $3,500 per ounce while investors exit U.S. assets. Tariff uncertainty leading to growth and inflation worries, along with President Trump’s dispute with the Federal Reserve, has gold experiencing a major rally. Gold has gained nearly 30% this year as the S&P 500 has declined 10%.^[4]

Chart 3: Gold and U.S. Equities Have Been Polar Opposites in 2025^[5]

Again, we do not think U.S. exceptionalism is dead. China and Europe will not be replacements for the U.S.; the U.S. has a superior capitalistic environment with less regulation and more free markets. But we are watching how investors are communicating their view on the world, with U.S. stocks, Treasuries, and the U.S. dollar all in decline, while gold is hitting all-time highs.

We knew 2025 was going to be a challenging year, as we discussed in our 2025 Outlook Webinar. The U.S. stock market was trading at an all-time high with valuations well-above historical averages and back-to-back years of +20% gains for the S&P 500. Today, the Nasdaq is trading at 23x forward estimates (compared to 36x in February), and the S&P 500 is trading at 20x forward estimates (compared to 27x in February). The Magnificent 7 was trading at 36x forward estimates in December, and now it is trading at 24x. Valuations have been greatly suppressed in the current selloff to much more reasonable levels. To note, the long-term average return is 7% for the S&P 500 and 3% for U.S. bonds.

We believe today’s environment will sort itself out over time. Through last Friday, Q1 2025 earnings are growing 7.2% y/y, in line with estimates heading into the quarter. Companies are yet to cut capital expenditure plans, although there has been recent news of decreasing investment to data centers. Additionally, a weaker dollar is better for corporations that do international business, and lower commodity prices are favorable for inflation and the consumer. We continue to keep an eye on the labor market which is showing no material weakness. Initial jobless claims are tame in the 220K/week range, and we have not seen a spike in layoffs. Our investment themes have not changed due to tariffs, and we are focusing on finding opportunities in the volatility.

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Sources:

^[1] Source: Investopedia. As of October 21, 2024.

^[2] Source: IMF. As of June 11, 2024.

^[3] Source: Bloomberg. As of April 22, 2025.

^[4] Source: Bloomberg. As of April 22, 2025.

^[5] Source: Bloomberg. As of April 22, 2025.

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