Commitment issues: Why investors are rethinking their relationship with the US

Meanwhile, the president’s repeated pressure on the US Federal Reserve (Fed) to lower interest rates and attempt to sack one of its governors, combined with his decision to fire the head of the employment statistics office when the data was disappointing, has raised questions about the integrity and independence of much-heralded US institutions. 

In early 2025, the emergence of a cutting-edge AI model from China’s DeepSeek challenged the prevailing notion of US technological superiority. Similarly, US economics professors Gordon Hanson and David Autor warned recently in a New York Times essay that China is leading the US in a number of advanced technologies and that the ‘second China Shock’ may be even greater than the first, when China emerged as a manufacturing powerhouse in the early 2000s³.

The resilience of the US economy has also been challenged this year by signs of weakening economic activity and a slowing jobs market. Taken together, all these factors have arguably undermined investors’ faith in the notion of American exceptionalism. 
 

Competing affections

The clearest indicator that investors have reconsidered their affection for the US has been the decline of the dollar. In the first half of 2025, the dollar fell by nearly 11% against a basket of currencies, the biggest decline in that period since 1973⁴. This move is particularly telling given the economic theory (and the widely held predictions of investors) suggested that the dollar 'should' have appreciated with the imposition of tariffs.

It’s complicated

Assessing the US equity market

When it comes to the stock market, however, it seems that concerns about Trump’s policies and the fiscal deficit don’t appear to have much influence on how investors think about US stocks.  

After underperforming at the start of the year, the US stock market has staged a powerful recovery since Trump’s postponement of reciprocal tariffs. US equities have advanced, even as foreign investors have started to question America’s appeal, and the market’s price-to-earnings ratio is currently well above its average for the past 20 years. 

Of course, there are strategic reasons why equity investors might choose to maintain exposure to the US. The world’s largest market is deep and highly liquid. American companies are innovative and entrepreneurial, and are consistently more profitable than companies in other major developed regions.  

There is also an established equity culture where dividends and buybacks are an integral part of the shareholder experience. Thanks to their dynamism and superior earnings growth, US equities have typically traded at higher valuations relative to the rest of the world.

However, with the S&P 500 back up around all-time highs, the US market’s elevated valuation, relative to its history, could be a reason for investors to be cautious. While being expensive is not in itself a reason for concern, it potentially limits the future returns from US equities relative to other regions that are trading at much lower valuations. 

Concentration risk

Many global investors may well have more exposure to the US equity market than they realise – the US represents over 70% of the MSCI World Index, for instance⁵. This might seem appropriate for the world’s biggest economy, but in fact the spread of investments is actually very narrow. 

Despite being the largest stock market in the world, by market capitalisation, it is essentially dominated by a handful of mega-cap stocks. The top 10 stocks in the S&P 500 now constitute around 40% of the index, the highest it’s ever been, and the largest single stock, semiconductor firm Nvidia, represents 8%⁶. The 10 largest stocks also contribute around 30% of the S&P’s earnings, significantly above historical levels.  

The most dominant players – commonly referred to as the Magnificent Seven (or Mag 7)⁷ – are all technology or internet-related companies and have recently seen their share prices and earnings supercharged by optimism about the future growth of AI. 

The reason why this extreme concentration in the market matters is that these companies have become so big that they have an outsized impact on market performance. It could be argued that they also have an outsized influence on the US economy, given the amount of capital investment they are spending on AI and data centres too. 

Just as these stocks have helped drive the market up, they could also drag the market down if they reverse. While the momentum behind AI is currently extremely powerful, earlier this year we saw stocks fall when China’s DeepSeek challenged prevailing views about the dominance of US tech. For passive investors in the US, a big drop in a major index constituent could prove costly. 

AI is likely to become more important, and these stocks look well positioned for the future. Despite their obvious attractiveness, however, it is worth acknowledging how big an influence these AI-related stocks have on both the US and the global market. 

Broadening horizons 

From a risk and diversification perspective, investors may start to question whether they are comfortable with so much exposure to such a narrow group of US stocks and the AI theme specifically. One solution may be to actively seek opportunities among the 493 stocks in the S&P that are regularly overshadowed by the Mag 7, and among US stocks outside of the index.

Alternatively, investors could broaden their horizons even further. As we discussed above, there are several other equity markets that have thrived this year, beyond the US. In Europe, Germany stands out, while Brazil, China and Korea are among the best performers in EMs. In fact, Brazilian stocks have gained around 18%, in local currency terms at the end of August, despite Brazil receiving some of the most punitive US tariffs. 

So, for investors concerned about concentration risk, policy uncertainty and valuations in the US, there could be potentially rewarding alternatives both within the US itself and across the global market.  

Enduring ties

The currency problem 

The decline of the US dollar this year has presented a challenge for overseas investors because it has eroded some of the return from dollar-denominated assets. The S&P 500 is up 10% this year, but for euro-based investors the return is negative (at the end of August).  

The prospect of further currency weakness, either related to rising debt levels or inflation, could well dampen enthusiasm for investment in the US. This situation echoes the famous quote by US Treasury Secretary John Connally, in 1971, that the dollar is “our currency, but it’s your problem.”

On a real effective exchange rate basis, the dollar has recently been the most expensive it has been since around 2001. In the past, the value of the dollar has fluctuated and periods of strength have been followed by multi-year declines. It is possible that this may happen again, although worries about the 'death of the dollar' are arguably overblown.  

A powerful factor underpinning demand for the dollar is the fact it is the world’s reserve currency. The dollar’s share of global foreign reserves has been declining gradually for 20 years, but it still remains the dominant reserve currency held by central banks around the world. In 2025, the US dollar represented over 61% of global reserves, far ahead of the euro (20%) and Japanese yen (6%)⁸.

As well as being regarded as a store of value, the dollar has a dominant position in the global financial system. This is partly a function of America having the deepest and most liquid financial markets, the most globally accepted currency, the largest economy in nominal terms⁹ and the most widely used currency in global trade. 

In recent years, there have been calls for ‘de-dollarisation’ – the idea that other currencies would play a greater role in the global economy, challenging the US’s hegemony.

Potential alternatives to the dollar include the Chinese renminbi. Although its share has been growing, there are arguably limits to the currency’s uptake, notably China’s capital controls as well as confidence in the political regime and respect for property rights.  

With regards to the European Union’s (EU) single currency, euro financial markets are not deep enough to replace the dollar, while the EU’s bond markets are national and trade differently. Meanwhile, demand for other currencies such as the Australian dollar and British pound is only likely to be marginal. 

Therefore, despite a gradual erosion in its status, the dollar’s dominance looks likely to remain for the time being and it will continue to be a problem for foreign investors to grapple with.  

Time to explore options?

When it comes to assessing whether America is still exceptional and what it means for investors, the situation is not straightforward. On the one hand, there are plausible reasons why investors should stick with the US. Corporate America has many strengths and investing in US equities has proven to be a successful way of generating long-term wealth.  

The US market is home to some exciting companies that look well placed to capture the growth of AI technology. However, the US equity market trades at an elevated valuation and performance is being driven by a narrow group of companies. Beyond the Mag 7, there is evidence that some domestically focused firms are facing strain from the slowing economy.

These factors might encourage investors to look more closely at non-US equities, where valuations are more attractive. 

However, for non-US equities to catch up over time, there would need to be a narrowing of the earnings growth differential. In the recent earnings season, companies in the S&P 500 were expected to deliver double-digit year-on-year earnings growth, whereas their European counterparts in the Stoxx 600 Index looked set to deliver no growth¹⁰.

There is a chance that Germany’s fiscal stimulus and increased European defence spending could provide a boost to corporate earnings in the coming years. Further afield, corporate reform programmes under way in Japan and South Korea may help earnings growth there, while emerging markets could benefit from a weaker dollar and an improving economic outlook.  

Therefore, while US companies have their merits, and some of the overlooked 493 may be potentially interesting investments, there are certainly some plausible options around the globe that could attract investors looking to move on and diversify their portfolios. 

Debt levels: Nobody’s perfect 

On the macroeconomic front, the picture is less clear. The US economy has been extremely resilient, but President Trump’s tariffs could present a challenge by raising costs for consumers and businesses. It is early days yet, but it is possible that inflationary pressures could start to build. 

As Trump’s tax plans look set to increase the level of government debt in the coming years, these factors could be a source of concern for bond investors. On the other hand, the higher tariffs could actually increase government revenues: it is estimated that the new tariffs have already raised US$88bn this year¹¹.  

Additionally, if inflation is well-behaved in the coming months, then US treasuries may offer attractive real (inflation-adjusted) yields. What is more, they could perform well in an economic downturn as interest rates are cut, despite prevalent fears over debt levels today.

From a relative perspective, the US does not appear to be that different from other major developed economies, which are also battling similar challenges of debt and deficits and ageing populations. The one possible exception to this challenge is Germany. 

The US debt burden may be rising and worry some investors, but the continued dominance of the dollar is arguably a source of reassurance. However, the unpredictable nature of current US policymaking and erosion of institutional norms is a potential threat to the long-run performance of the US dollar.
 

Reassessing the US – a nuanced picture 

In summary, the idea that investors might be rethinking their commitment to the US is nuanced. There are some evident challenges with the US – some of which are shared with other economies – that might motivate investors to explore new opportunities beyond the US and broaden their portfolios. 

Conversely, there are also some compelling reasons to stay true to the US market. Warren Buffett once remarked: “Never bet against America,” and the US is likely to remain at the heart of many investment portfolios. But for investors who think the odds have shifted unfavourably, it may be time to consider adjusting their allocation and look elsewhere for some promising opportunities.  

¹ NBC News, ‘Trump's 'big beautiful bill' is projected to add $3.4 trillion to the debt, budget office says’, (nbcnews.com), July 2025.
² Congressional Budget Office, ‘The Long-Term Budget Outlook: 2025 to 2055’, (cbo.gov), March 2025.
³ The New York Times, ‘We Warned About the First China Shock. The Next One Will Be Worse.’, (nytimes.com), July 2025.
⁴ Financial Times, ‘US dollar suffers worst start to year since 1973’, (ft.com), 30 June 2025.
⁵ MSCI.com, August 2025.
⁶ Yahoo!finance, ‘The growing risk hidden in the S&P 500 and what investors can do about it’, (ca.finance.yahoo.com), August 2025.
⁷ The Magnificent Seven are Nvidia, Microsoft, Apple, Amazon.com, Meta Platforms, Alphabet and Tesla.
⁸ LSEG Datastream/Fathom Consulting, March 2025.
⁹ Adjusted for price levels (PPP), China’s economy is a third bigger than that of the US.
¹⁰ Financial Times, ‘Lessons from an upbeat US earnings season’, (ft.com), August 2025.
¹¹ The Budget Lab at Yale, ‘Short-Run Effects of 2025 Tariffs So Far’, (budgetlab.yale.edu), September 2025.