Page 9 - FWP Wealth Adviser newsletter - June 2025: Issue112

ISSUE 112
MAY 2025

According to Firstlinks’ New Capital driven by low interest rates, tech domi-
Cycle is Driving US Exceptionalism, the No discussion of US nance, and a flood of global capital into
US is entering a rare and powerful phase markets is complete US equities. But can this performance
of capital expenditure and productivity continue?
growth: without addressing According to Firstlinks’ Mapping
“The US is entering a rare phase the debate over Future US Market Returns:
where capital expenditure, productivity “exceptionalism.” Is “Over the next decade, US equities
gains, and reshoring synergies could may deliver 3-5% annualised returns, far
sustain growth despite global head- the US truly unique, below historical averages, as valuations
winds.” or are its advantages normalise.”
This “new capital cycle” is being This sober assessment reflects several
fuelled by several interlocking trends: overstated in a world key realities:
of rising multipolarity
1. Technological Innovation and and deglobalisation? 1. Valuation Headwinds
Productivity US equities, particularly large-cap
The US continues to lead in high-im- technology stocks, are trading at histor-
pact sectors such as artificial intelli- ically high multiples. The Shiller CAPE
gence, cloud computing, and biotechnology. As the article ratio, a widely respected measure of cyclically adjusted
notes, “US tech giants are deploying capital at an unprece- price-to-earnings, remains elevated. As Robert Shiller has
dented scale, driving network effects and productivity gains warned in Irrational Exuberance (2000), such valuations
that are difficult for other markets to replicate.” (Firstlinks, often precede periods of lower returns.
New Capital Cycle is Driving US Exceptionalism)
2. Demographic Drag
2. Energy Independence and Reshoring An ageing population and slower workforce growth may
The shale revolution and investment in renewables have dampen economic expansion, even as productivity gains
made the US less reliant on foreign energy. Meanwhile, the from technology offset some of these effects.
reshoring of manufacturing-partly in response to geopolit-
ical tensions and supply chain vulnerabilities-has created 3. Interest Rate Normalisation
new domestic investment opportunities. The era of ultra-low rates is ending. Rising yields increase
the discount rate applied to future earnings, putting down-
3. Demographic and Institutional Strength ward pressure on equity valuations.
While the US population is ageing, it remains more Despite these headwinds, there are reasons for cautious
dynamic than many developed peers, with higher fertility optimism. As Jeremy Siegel argues in Stocks for the Long Run
rates and strong immigration flows. Its legal and financial (2022), equities remain one of the most reliable long-term
institutions continue to attract global capital. hedges against inflation and economic shocks. Moreover,
These factors, taken together, suggest that the US may be the US market’s ability to adapt-by fostering new industries
better positioned than many expect to weather global head- and reallocating capital-remains a powerful advantage.
winds. As Ray Dalio observes in Principles for Navigating As the Firstlinks article notes:
Big Debt Crises (2018), “Countries with deep, liquid capital “While the path forward is unlikely to match the ex-
markets and innovative cultures tend to recover faster from traordinary gains of the past decade, the US market’s depth
shocks and attract capital during times of global uncertain- and adaptability continue to offer unique opportunities for
ty.” discerning investors.” (Mapping Future US Market Returns)
However, these strengths are not unassailable. The For investors, the implication is clear: future returns may
very forces that have propelled US exceptionalism-such as be lower and more volatile, but the US remains a critical
technological concentration and globalisation-also create anchor in global portfolios.
new risks, as we will explore.
The Case For and Against
Mapping Future US Market Returns: US Stock Market Exceptionalism
Opportunities and Risks No discussion of US markets is complete without ad-
For investors, the critical question is not just whether dressing the debate over “exceptionalism.” Is the US truly
the US remains exceptional, but what this means for future unique, or are its advantages overstated in a world of rising
returns. The past decade has seen extraordinary gains, multipolarity and deglobalisation?

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