US exceptionalism under pressure, but far from over

US exceptionalism—the belief that the US economy and financial markets are uniquely positioned to outperform other global markets over the long run—has come under intense scrutiny this year. President Donald Trump’s disruption of global trade through erratic policies and aggressive tariffs, his attacks on universities, and growing concerns over rising fiscal deficits should the One Big Beautiful Bill Act be passed have all contributed to outflows from US equity markets in recent months.

To put the current scepticism into perspective, it is worth considering how US markets have performed over the longer term. Over the past two decades, the S&P 500 has delivered total returns of approximately 477%, significantly outperforming other major indexes including MSCI China, the Straits Times Index, STOXX Europe 600, and the Nikkei 225, as of 26 June 2025. In our view, it remains premature to declare an end to US exceptionalism as the structural advantages that have driven this outperformance in equity markets are still very much intact.

Figure 1: The US stock market has outperformed its global peers over the long run

Structural drivers of US outperformance

1. Rich culture of innovation and entrepreneurship

The US has long been a global leader in innovation and entrepreneurship. According to the 2024 Global Innovation Index, the US is the third most innovative country in the world, ranking the highest in nine of the 78 GII indicators including the impact of its scientific publications, intellectual property (IP) receipts, average R&D spending of the top three companies per country, and the quality of its universities.

Home to world-renowned institutions such as the Massachusetts Institute of Technology, Stanford University and Harvard University, the US benefits from academies that not only produce cutting-edge research but also serve as incubators for startups and groundbreaking technologies.

While recent policy shifts—such as federal funding cuts to universities—pose near-term challenges, we believe the country’s culture of innovation will prevail, supported by a robust network of private capital, world-leading tech firms, and universities actively fighting for their autonomy in court.

Table 1: The majority of the world’s top universities are located in the US

Rank	University	Country
1	University of Oxford	UK
2	Massachusetts Institute of Technology	US
3	Harvard University	US
4	Princeton University	US
5	University of Cambridge	UK
6	Stanford University	US
7	California Institute of Technology	US
8	University of California, Berkeley	US
9	Imperial College London	UK
10	Yale University	US
Source: Times Higher Education World University Rankings 2025

This enduring innovative spirit is further bolstered by America’s strong culture of entrepreneurship, which openly embraces risk-taking and maintains a high tolerance for failure. This is evident in its relatively forgiving bankruptcy laws that permit bankrupt businesses to continue operations while they restructure their debts. It is no wonder that the US has such a high level of entrepreneurial activity. According to the 2024 Global Entrepreneurship Monitor (GEM) report, the US achieved a Total early‑stage Entrepreneurial Activity (TEA) rate of 19%, well above the 12% average for high‑income economies. In other words, almost one in five adults in the US is actively starting or running a new enterprise.

2. Well-developed and deep capital markets

Alongside a strong culture of innovation and entrepreneurship, the US boasts the world’s most liquid and deep capital markets, providing the essential funding and resources needed to scale startups into major enterprises. In 2024, US startups attracted 57% of global venture capital investment, far outpacing Europe and China, which accounted for just 16% and 12%, respectively. Despite the economic tensions caused by Trump’s confrontational trade policies, US companies continued to secure the bulk of global venture capital funding in the first half of this year (Figure 2). This abundant access to capital empowers entrepreneurs to turn promising ideas into profitable, scalable businesses.

Figure 2: US companies received the majority of global venture capital year-to-date

This steady pipeline of well-funded, high-growth firms has, in turn, created a concentration of high-quality companies on US stock exchanges, reinforcing the country's appeal to both investors and entrepreneurs. In fact, many companies around the world have forsaken their home markets in favour of a US listing to gain better liquidity and higher valuations.

Just this month, one of the UK’s biggest fintech companies, Wise, announced plans to move its primary listing from the London Stock Exchange (LSE) to the US, citing the shift as “a potential pathway to inclusion in major US indices, further enhancing liquidity and demand for Wise shares”.

While stock exchanges such as the LSE and the Singapore Exchange (SGX) continue to struggle to attract initial public offerings, the US remains a thriving destination for global listings.

3. The global leadership of American companies

Many US companies operate on a global scale, holding dominant positions not only domestically but across various international markets. Notable examples include JPMorgan in finance, Eli Lilly in healthcare, and ExxonMobil in energy. However, nowhere is US leadership more pronounced than in the tech sector, where Big Tech firms dominate their entire industry or even multiple industries.

For instance, Amazon, Microsoft, and Alphabet hold over 60% of the global cloud market share, while Alphabet, Meta, and Amazon collectively capture more than 60% of global digital advertising spending. Their key competitive advantages, such as network effects and high switching costs, have made their products and services integral to the daily operations of global consumers and businesses, enabling them to sustain growth and profitability over time. Therefore, while it might be relatively easy to boycott US companies like Tesla due to the availability of substitutes, avoiding companies like Google or NVIDIA is far more difficult.

China is indeed showing signs of catching up technologically with the US, as demonstrated by companies like DeepSeek. However, we believe that US tech firms will maintain their lead in the AI race, supported by export controls on advanced technology and substantial capital expenditures. The top three US cloud providers in the US (Amazon, Microsoft, and Alphabet) are expected to spend a combined USD 243 billion in capex this year, more than eight times the projected capex of China’s top three cloud providers: Alibaba, Tencent, and Baidu (Figure 3).

Figure 3: Capex of US cloud providers are expected to outpace their Chinese peers significantly

4. Dollar status as the world’s reserve currency

Finally, the USD’s role as the world’s reserve currency continues to underpin demand for US assets, allowing the country to finance its debts and deficits at relatively low costs. This unique advantage enables the US to fund consumption and public spending more easily than most other nations.

Despite growing calls for de-dollarisation, the dollar remains deeply entrenched in the global financial system, accounting for about 90% of FX transactions, 49% of SWIFT transactions and 58% of global foreign exchange reserves. While the dollar’s share of reserves has declined from 65% in 2016, it is likely to retain its dominant role for the foreseeable future. Its closest competitor, the euro, remains far behind at just 20% of global reserves and faces structural limitations such as the absence of a unified fiscal framework. Meanwhile, the Chinese yuan is constrained by capital controls, and non-fiat alternatives like digital currencies are still in their early stages of development.

In short, despite its flaws, the dollar currently faces no credible alternative.

Figure 4: Dollar’s share of global reserves has declined but remains dominant 

Nonetheless, we acknowledge that the dollar is likely to face continued headwinds in the second half of this year. While US rates may stay high amid persistent inflation risks, the dollar’s yield advantage could shrink as other central banks stop cutting or ease rates more gradually, narrowing rate differentials. Moreover, the worsening of the country’s twin deficits — fiscal and current account — shows little sign of reversal. Although the dollar’s dominant role in the global financial system has historically shielded it from depreciation pressures, this buffer appears to be weakening as rising protectionism erodes investor confidence in US assets. From a valuation standpoint, the dollar also continues to look overvalued in real effective exchange rate (REER) terms, trading at one standard deviation above its long-term average.

Figure 5: The USD is still expensive despite its pullback since the start of the year

Concerns over the US fiscal outlook are also intensifying. The Congressional Budget Office projects that the One Big Beautiful Bill Act (OBBBA), as passed by the House of Representatives, would add USD 2.4 trillion to primary deficits over the 2025–2034 period. Correspondingly, debt held by the public is projected to increase from 100% to 124% of GDP in the same period. According to the Penn Wharton Budget model, US debt becomes unsustainable when debt held by the public as a percentage of GDP exceeds about 175-200%. This suggests that US debt is still manageable in the short to medium term.

Looking further ahead, a debt crisis could occur in the next two to three decades if fiscal trends continue unchecked. The Committee for a Responsible Federal Budget estimates that public debt could rise to 172% of GDP under OBBBA as written and rise to 190% GDP if provisions are made permanent (Figure 6). That said, the bill is still under discussion in the Senate and remains subject to change.

Overall, although the dollar may continue to face headwinds, its entrenched position in global trade, investments, and reserve holdings is likely to ensure its continued dominance for the foreseeable future.

Figure 6: Public debt is projected to surge over the next three decades under OBBBA

Don’t write off the US just yet  

Warren Buffett’s famous advice—“Never bet against America”—continues to hold true today. While short-term sentiment toward US assets has soured amid economic uncertainty, the long-term foundations of US exceptionalism remain intact. These structural strengths have underpinned decades of outperformance in US equities and, in our view, are unlikely to be undone by recent political disruptions.

That said, given the evolving trade policy landscape and heightened uncertainty, we continue to advocate a selective approach to US equities—focusing on companies with strong fundamentals and greater resilience amid slowing growth and elevated inflation. We particularly like high quality companies within the digital economy and semiconductor space, as the earnings of these companies are well-supported by the structural growth trends of digitalisation and artificial intelligence (AI).

For investors with portfolios heavily weighted toward the US, diversifying into other markets such as China, Japan, or Europe can help mitigate concentration risk. Alternatively, investors who lack strong convictions in these markets or prefer a simpler diversification strategy can consider investing in a global ex-US fund to reduce their exposure to the US.

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Table 2: Recommended products

Sector/Style	Recommended Products
US Quality Stocks	•       JPMorgan U.S. Quality Factor ETF (NYSE: JQUA)
Technology	•       Fidelity Global Technology A-ACC-USD •       Eastspring Investments Unit Trusts - Global Technology SGD •       Invesco NASDAQ Internet ETF (NASDAQ: PNQI)
Semiconductors	•       VanEck Semiconductor ETF (NASDAQ: SMH)
Global ex-US	•       Vanguard FTSE All-World ex-US Index Fund ETF Shares (NYSE:VEU)
China	•       iShares Core MSCI China ETF (HKEX:2801) •       Fidelity China Focus A-SGD •       iShares Hang Seng TECH ETF (HKEX: 3067 / 9067)
Europe	•       Eastspring Investments Unit Trusts - Pan European SGD •       Vanguard FTSE Europe ETF (NYSE:VGK)
Japan	•       Xtrackers Nikkei 225 UCITS ETF 1D (LSE:XDJP) •       Eastspring Investments - Japan Dynamic AS SGD

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.