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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is co-global head of investment strategy for JPMorgan Private Bank
Market narratives tend towards extremes. Is the US an unstoppable economic power or a cautionary tale of debt and dysfunction? The truth, as is so often the case in investing, lies somewhere in between.
Investors face considerable policy uncertainty from a new US administration. The public debt and deficit have risen dramatically, and pending legislation would likely exacerbate the trend. As the dollar has weakened and long-term bond yields have risen this year, we’ve heard growing calls for investors to slash their exposure to US assets.
I would recommend a scalpel, not a hatchet. US exceptionalism, broadly defined as US economic and market leadership, has not disappeared although it may be shifting in significant ways.
A key and under-appreciated element of US exceptionalism is the economy’s productivity engine and that remains very much in force. By any measure, productivity — essentially producing more with less — is a key determinant of long-term economic growth and corporate profitability. On this critical front, the US continues to lead and that can keep US equities a core holding in global portfolios for many years to come.
Since the pandemic, US business sector productivity has grown at more than 2 per cent per year — a marked acceleration from the decade before — while the same measure in Europe and Japan has barely been positive. While US technology grabs the headlines, productivity gains are evident across professional services, logistics and even healthcare as firms embrace AI, automation, and digital infrastructure.
Higher productivity has tangible implications for investors. It can increase corporate profitability, boost overall GDP growth and act as a deflationary force in the face of inflationary shocks. The Federal Reserve now estimates US long-run growth between 1.5 and 2.5 per cent — a meaningful step up. Europe and Japan, by contrast, remain hampered by weaker demographics and slower adoption of productivity-enhancing technologies. No surprise, then, that US companies continue to generate stronger margins and more reliable cash flows when compared with their developed market peers.
However, two further developments could challenge the US productivity edge and further narrow the gap between the US and other developed markets.
First, the US administration’s evolving tariff strategy and levies have the potential to constrain growth and boost inflation. Restrictive trade measures could disrupt US supply chains and push up costs, undermining the productivity gains businesses have worked hard to secure. Historically, US productivity leadership has relied on open, competitive markets.
Second, as Europe’s economic outlook brightens, its productivity growth could improve meaningfully. The report last year by former Italian prime minister and European Central Bank president Mario Draghi laid out an ambitious agenda for enhancing European competitiveness. Germany’s recently announced fiscal stimulus could potentially increase annual Eurozone growth from a paltry 0.5 per cent pace in 2025 to more than 1 per cent in 2026.
Should both these trends materialise and/or accelerate, it would weaken the case for a significant overweight to US equities
However, if weakness emerges in US assets, it will show up more in the dollar, not US stocks. We see no meaningful threat to the dollar’s reserve currency status. But the currency looks more vulnerable to shifting capital flows and softening rate differentials than a stock market underpinned by structural productivity gains.
Thus, even as the dollar likely weakens in the coming quarters, US equities can continue to make new highs. This year’s gains — with the S&P 500 now in the green year-to-date and up roughly 20 per cent from its April lows — tell us that equity investors are pricing in a reality many narrative-driven commentators are missing.
Over the next 12 months we still expect a narrowing gap between the US and rest of the world’s asset class performance — non-US equities look increasingly compelling, particularly for dollar-based investors. Overall, I favour developed markets, especially Europe and Japan, over emerging markets. But while America’s economic leadership may be increasingly contested, its productivity engine remains a powerful force, keeping US equities central to global portfolios. Investors would do well not to forget that.
