The strong recovery on Wall Street and the rise of the dollar have not allayed investors’ concerns that US assets may outperform overseas markets. While trade agreements signed by the Trump administration have driven stock markets to record highs, the weakening dollar and growing budget deficit have shaken the belief that US financial markets will deliver the best returns globally.
For many investors, the belief in “American exceptionalism,” the idea that the US’s democratic system and large, liquid capital markets offer unique advantages, has remained unchanged for over a decade. However, uncertainty regarding tariffs has begun to erode this confidence.
Although Trump’s deals with the EU, Japan, and South Korea have provided some relief, the US president has set a deadline of September 1 for reaching agreements with other major trading partners or imposing new tariffs. The impact of the trade wars has led to reassessments following Trump’s statements on tariffs earlier this year. The state of US markets appears “a bit wounded,” says Lori Heinel of State Street Global Advisors.A survey conducted in May and June showed that many institutional investors managing $4.9 trillion in assets reduced their long-term strategic allocations to the US market. Optimism towards the US market declined compared to Europe, China, and other emerging markets.
Noting that the impact of tariffs is still not fully understood, CoreData reviews the effect of US trade policies on economic growth. Although the S&P 500 index rose by 27.2% to reach new records, 49% believe that the impact of trade tariffs on markets is not taken seriously enough. The US dollar may weaken as the world’s reserve currency. Thierry Wizman of Macquarie Group attributes this to “the US losing its role as a free trade broker.” Furthermore, Trump’s efforts to exert political pressure on interest rates and the government’s massive budget deficit could lead to higher yields on long-term government bonds. Technological innovations, however, are overcoming investors’ pessimistic views by ensuring that the US still has the most innovative and profitable companies. But while European stock markets outperformed the US in March of this year, the gap has narrowed with each new trade agreement, and the STOXX 600 and S&P 500 are now almost neck and neck. Technology is emerging as a decisive factor in the future of markets. It is stated that the integration of Artificial Intelligence is still in its early stages.
