Exceptional No More: The U.S. Lost Its Halo

For much of the 20th and 21st centuries, the United States has enjoyed a unique position of financial dominance over the rest of the world. This is what's called "U.S. exceptionalism," implied by the phrase itself, but not only superior economic performance, but also structural advantages that underpinned the American hegemony.

These include highly liquid financial markets, a deep and stable bond market, the role of the U.S. dollar as the global reserve currency, a strong and flexible labor market, and widespread geopolitical influence.

However, analysts have long cautioned (e.g., Ray Dallio) that this supremacy was not sustainable and immutable as it appeared. Critics argued that the foundation of U.S. dominance is not a permanent feature of the global order but rather contingent on fragile structural advantages that are now beginning to erode.

The narrative of U.S. exceptionalism has rested on assumptions of enduring economic and institutional superiority. Yet beneath this narrative lie several vulnerabilities and cracks are starting to show.

• Ongoing budget deficits and increasing national debt raise worries about the long-term sustainability of our finances.
• The global demand for the U.S. dollar has allowed for an expensive monetary policy, but this privilege depends on the continued trust in U.S. institutions.
• The idea that geopolitical dominance automatically leads to economic stability is being increasingly questioned.
• Political dysfunction erodes both economic confidence and the legitimacy of U.S. global leadership.

Until recently, these factors were regarded as theoretical concerns rather than imminent threats. Financial markets continued to reward U.S. assets, and investor sentiment remained resilient.

Structural Shift: “US Buys Goods, World Buys Assets” to Buyers’ Strike

Global fund flows indicate a shift of capital from U.S. markets to emerging economies or alternative safe havens.

• Market behavior shows that investors are increasingly unsure about the strength of U.S. markets due to global tensions and rising interest rates.
• U.S. equities, long considered overvalued compared to global peers, have started to underperform, signaling a repricing of risk and growth expectations.
• There's erosion of trust. Strategic competitors and long-standing allies are reassessing their reliance on U.S.-centric financial and security frameworks, partly due to recent unilateral policies and global fragmentation.

Since the U.S. froze assets from Russia and now with Trump as president, countries seek alternatives to the U.S. dollar for their reserves and trade. This could challenge the dollar's hegemony.

Global investors are rebalancing portfolios towards regions with more attractive risk-adjusted returns or perceived political neutrality, such as Western European countries.

For decades, the US economy operated under mutually beneficial flow. It ran persistent current account deficits, importing goods from the rest of the world while exporting dollar-based financial assets that foreign investors were happy to buy.

Global demand for treasuries, corporate bonds, and equities helped keep yields low, the dollar strong, and equity valuations high, but now that cycle is fraying.

Foreigners own:

• 33% of U.S. treasuries (~$85 trillion)
• 27% of corporate bonds (~$4.4 trillion),
• 18% of U.S. equities (~16.5 trillion)

If this demand dries up, the implications are big: higher yields, a weak dollar, and failing equity multiples (which have been happening). Foreign inflows into U.S. equities have turned sharply negative, with the four-week average approaching crisis-era lows. Last week, they pulled $6.5 billion from U.S. equities and $3 billion from corporate bonds while still allocating $0.6 billion into treasuries. There's a preference for liquidity and safety over yield or risk.

Household hit

What makes this even grimmer is its coinciding with a serious negative wealth effect at home as -$8 trillion year-to-date decline in US household equity holdings, a sharp reversal from 2024s $9tn wealth gain (Damn, I am starting to miss Biden)..

This wealth destruction matters. In the U.S., where consumption is 70% of GDP, household net worth isn't just a "nice-to-have" growth driver. The risk is that falling asset values will evaporate consumer confidence, slow spending, and feed recessionary momentum even if the labor market remains tight.

Yield-hungry retirees have long been shorthand for the retail bid in municipal bonds, so when muni bonds crack, it's not just a market story, it's a household story.

• Retail investors, especially older Americans living off fixed income just took a hit
• The "safe haven" status of munis is being questioned due to rate volatility, waning tax advantages or state/local credit concerns
• Retirees are feeling the pinch. The pain is moving downmarket and getting personal right into the "wealth effect" zone.

• Treasuries saw their largest-ever weekly inflow (+$18.8bn)
• High-yield bonds posted their biggest outflow on record (-$15.9bn)
• Bank loan funds (-$5.4bn) and financial stocks (-$3.6bn) also saw historic outflows
• Investment-grade bonds had their worst week since October 2022 (-$12 bn)
• Equities saw a massive $48.9bn inflow, but that was entirely passive-driven (+$70.3bn into ETFs) while active funds bled (-$21.3bn)

But this is also massive ETF inflows during liquidations, it tends to happen in stress scenarios like Lehman or Covid, where ETF "share creation" serves as a pressure valve rather than a signal of bullish conviction. Do not confuse passive flows with real risk appetite.

Historically, a forward P/E ratio of 20x on the S&P 500 was considered a floor in low-rate, high-liquidity environments. Now, during tighter policy, capital outflows, and less international support, don't be surprised when 20x suddenly starts to act as a ceiling.

Assuming $250 in 12-month forward EPS, the fair value for the S&P500 in a shallow recession around 4800 (P/E ~19x-20x) is where one can consider adding risk.

Any US recession is likely short/shallow and priced-in around S&P 5000-4800 ($250 EPS + policy response permits P/E 19-20x)

If policy panic sets in and cuts the drawdown short, however, many are bearish, calling for a fall towards $230 multiples, compressing to 17x 18x, which would drag the index down to the 4000-4200 zone. I don't see that happening yet.

Avoiding a full-blown bear market or recession hinges in 2 key policy drivers

• Rate cuts, but not just any cuts. They have to stabilize the long end of the curve. That means preventing 10- and 30-year yields from drifting higher, which would tighten financial conditions even as the front end eases.
• US-China trade detente. An easing of tariffs or tech restrictions could revive global trade flow, boost sentiment, and reverse some of the dollar's strength, offering relief to EM and cyclical sectors.

The calculus is getting tricky here

Recent polling since Liberation Day (Trump's post-primary general election push) shows his approval rating sliding from 48-50% to 45%

This increases market pressure for more accommodative trade policy. Markets tend to rally on de-escalation. It also puts pressure on the electoral erosion base, especially among business and financial backers, to push policy moderation.

The real risk here is that if Trump's approval continues to erode, he may lose the capital needed to pass a second round of corporate tax cuts in the second half of 2025. That's the red line for remaining bills.

If tax cuts are off the table, we could see a final flush and capitulation of the last buyer who had anchored bullish scenarios around fiscal stimulus and profit margin support.

For now, focus on yield

High-quality, long-dated US corporate bonds, many of which are now yielding 5-6%, a level that offers equity-like returns, with lower volatility and higher capital preservation.

Where equity multiples are compressing and capital flows are reversing, this is bear-market math. Get paid to wait

Own equity income, among the S&P500 names, 71 companies yielding over 4%, and 41% yielding over 5%

In a rising-rate, risk-off world, dividend resilience matters more than the growth narrative. According to Bank of America's Michael Hartnett, focus on companies with the capacity and credibility to defend payouts.

Also noteworthy are, energy, healthcare and staples

With the dollar showing signs of entering a secular downtrend, driven by declining foreign appetite for treasuries and growing US fiscal imbalances, long-term rotation is expected into emerging market equities, commodities, and commodity-linked equities.

Your classical dollar hedge trade that gains from global recession, should China or Europe pivot towards stimulus later in the year, but be ready to buy the policy pivot. Once the fed does cut, and only when it's clear the pivot is aimed at stabilizing markets, not chasing inflation. Shift into cyclical beta

• US Semiconductors
• Retail/homebuilders (leveraged real rates and consumer strength)
• European cyclical
• cyclical
• China Tech (if geopolitical risk abates and policy supports firms up)

But this is about position for the post-liquidation bounce, do NOT try to front-run the pivot.

Currently, 76% of the MSCI ACWI country indices are trading below both their 50-day and 200-day moving averages. This figure is approaching, but has not yet reached, the BofA “Global Breadth Rule,” which is triggered when it hits 88%. Historically, when this signal activates, the MSCI ACWI tends to rally by 4–5% over the next four weeks.

According to Bank of America Hartnett, we are close to a contrarian buy zone, but we haven't quite arrived there yet. Hartnett recommends exercising patience. Wait for the breadth to fully wash out and for policy changes.

Stay paid & Wait for panic

• Clip income from credit and dividends
• EM and commodities
• Stay flexible for the pivot and wait for confirmation to when it's real

Also, warming up the VWAP bid, buyback blackout to end around April 25th.

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European Equity Outperformance Requires a Leap of Faith (Believe in something?)

One must accept a few big contrarian premises to believe in sustained European equity outperformance. That US big Tech will underperform meaningfully, that a stronger euro can keep lifting relative returns, and that the European economy can outgrow America. The recent rally has been real, but staying power depends on whether this divergence from the past is durable or just another false dawn.

European equities have mainly outperformed because US megacap tech hasn't been leading. If that trend reverses, the European equity trade is dead in the water.

The S&P 500 is essentially a Tech + AI play, with the Mag 7 plus Broadcom now making up 32% of the index. Meanwhile, MSCI Europe has only 2 systematically important tech names: SAP and ASML, worth a combined 4.3% of the index.

Europe isn't cheap because it's the underweight dominant growth engine of the cycle. So for Europe, to keep outperforming, either:

• US tech has to underperform dramatically
• The rest of the market has to rally without it (something that rarely happened for long)

If you're long Europe, you're short US tech by default. That's a tough structural position to maintain in a world still powered by semis and AI.

A reminder. Europe outperforming is often code for "the dollar is weakening"

MSCI Europe is 80% priced in euros and 20% priced in British pounds

Over the past 100 trading days, the strength in the Euro and British pound has accounted for 7.2% of MSCI Europe outperformance, about 46% of the total

Unless you believe the dollar is heading into a clear, lasting bear market, this tailwind could fade fast

Remember, A weak dollar usually requires either a Fed pivot or a global risk-backdrop where European and EM assets rally on their own terms.

Right now, we are in a "soft disinflation with sticky rates" regime, so here's a translation

Betting on Europe is a bet on FX just as much as fundamentals & FX tailwinds are notoriously fleeting

Believing the European economy can finally outgrow the US, or at least look relatively more attractive

• Germany's €1 trillion plan to improve infrastructure and defense is a major policy change. This is especially important for a country that usually avoids spending more than it earns.
• Broader EU policy coordinating and investment, especially in green energy, tech, and defense improving
• Meanwhile, the US is pivoting towards fiscal restraint. US politics is turning more hawkish on deficits, which could constrain future spending.

Still, the data doesn't scream Europe is great again

• Growth differentials still favor the U.S.
• European inflation is falling faster, but it's partly due to weaker demand
• Labor market and productivity trends remain stateside

Europe may have a fiscal narrative, but it still lacks the structural growth story to back this up

How can it be different this time?

1. US big tech rolls over, S&P multiple compression, while Europe looks resiliant
2. EUR and GBP hold or strengthen --> currency adds 3-5% to total return
3. European fiscal push supports growth --> offsetting structural weakness in productivity and demographics

THAT'S A HIGH BAR. Macro uncertainty, rising US political risk, capital outflow,s and valuation to US rates could keep capital flow towards perceived safety and "value"

You don't need to love Europe, you just need to be more afraid of the US to buy European equities

The easy call is betting that history repeats itself and the SPX500 outperforms again over the next 3 - 4 months. To bet in the European stock index, one must truly be convinced that this time is different.

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