Source: Barron’s Macro
Conditions in markets outside the United States seem even worse, but as Ashley Lester wrote in a guest commentary, some cracks are starting to show.
This year, global investors have experienced significant volatility. The U.S. stock market first plummeted and then rebounded strongly. The dollar weakened unexpectedly. Debt levels surged, and international trade relations became increasingly strained. Global investors are left wondering whether the United States remains the safest investment destination in the world, or merely the ‘relatively’ less unsafe option.
The answer to this question hinges on three interwoven forces: whether the ‘gravitational pull’ of capital towards the technology sector can be sustained, the stability of the U.S. institutional framework, and the growing trend of fiscal dominance.
To date, the U.S. market has maintained an astonishing dominance. Since the global financial crisis of 2008-09, the annualized returns of the U.S. stock market have outpaced other global markets by 7%. Approximately two-thirds of the world’s publicly traded equity market capitalization is concentrated in the United States. A similar proportion holds true in private markets, where U.S. assets dominate allocations in private equity, credit, and venture capital.
There are two reasons for this dominance, both equally important. The first is obvious: technology. The United States has become synonymous with the most transformative technologies of our time, not only artificial intelligence but also cloud computing, semiconductors, and platform-based enterprises capable of scaling globally.
The second reason, though less conspicuous, is equally crucial: the United States has historically maintained a predictable, enforceable, and fair regulatory system. This is reflected in the openness of its capital markets, the depth of its securities exchanges, and the authority of its judicial system.
But what happens when these rules, regulations, and the institutions that support them begin to falter?
This year’s market performance has already sounded a warning. Following the Trump administration’s announcement of tariff hikes in April, the U.S. market experienced a ‘triple alarm’ moment: simultaneous sharp declines in equities, bonds, and the dollar. The last time these three indicators weakened simultaneously over an extended period was in the 1970s, when the United States faced multiple shocks from economic instability, political turmoil, and the oil crisis.
By May, the market had regained momentum, making the ‘triple alarm’ appear to be a temporary panic. However, markets often foreshadow future changes. Recall May 2007, when the U.S. asset-backed securities market briefly froze before returning to apparent normalcy—only for the global financial crisis to erupt later that year, exposing latent risks. Prudent investors always watch closely for early cracks beneath the surface of the market.
Another threat to U.S. dominance is the gradual shift toward a fiscal dominance model, where the government, in response to high debt pressures, forces monetary policy to yield to fiscal demands.
The debt pressure in the United States is real: the federal government’s current interest payments on debt have surpassed defense spending. Last year, the United States breached the ‘Ferguson Rule’ for the first time — a principle proposed by historian Niall Ferguson, which posits that any major power spending more on debt servicing than on defense risks losing its status as a global power.
However, other developed markets are also struggling to boost investor confidence. Japan’s new prime minister faces increasingly severe fiscal challenges, with sluggish economic growth and insufficient political momentum for reform; since 2024, France has changed its prime minister four times due to fiscal issues; and the UK Labour government is walking a tightrope between unpopular tax hikes and unsustainable debt levels. These markets are all burdened by high debt, with troubling fiscal outlooks.
By comparison, the United States still stands out. Despite the fog surrounding its fiscal condition and institutional stability, capital continues to flow in. This is largely due to the support of the technology sector, allowing the U.S. market to deliver excess returns.
Investors seek returns, and at least for now, they see hope in the U.S. technology sector. The technology sector accounts for approximately 35% of the MSCI USA Index, while in the MSCI EAFE Index, which covers Europe, Australasia, and the Far East, this proportion is only 8%. The projected long-term earnings per share growth rate for U.S. equities is 15%, compared to just 11% for the EAFE region.
The technology industry serves as the ‘large-cap engine’ supporting U.S. stock market dominance. Since 2009, the total market capitalization of U.S. stocks has increased by $50 trillion, with 75% of that growth contributed by only 150 stocks — representing just 3% of all listed companies in the United States. During the same period, revenue per employee for large U.S. companies doubled, while revenue per employee in Europe and Japan stagnated.
Large-cap U.S. companies seem to defy the laws of gravity. Historically, ultra-high growth typically reverted to normalcy within five to seven years. However, many of the largest U.S. companies have sustained such extraordinary growth for nearly twice that duration. As a result, value investors in the U.S. have endured significant challenges over the past decade.
Many institutional investors we engage with express a desire to reduce their exposure to the U.S. market — not because they lack confidence in U.S. companies, but due to concerns about the financial and political systems behind them. Nevertheless, they find few viable alternatives. Consequently, many continue to hold substantial positions in U.S. equities but hedge against dollar risk.
We are undergoing a test of fiscal capacity, institutional resilience, and technological concentration. Meanwhile, investors remain pragmatic. They will continue to ride the technology wave but will closely monitor subtle shifts in political winds.
Editor /rice
