The world is changing, the U.S. market is not

Traders work on the floor of the New York Stock Exchange in New York City. Photo by TIMOTHY A. CLARY/AFP via Getty Images files

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It’s suddenly fashionable to talk about how the era of “American exceptionalism” is ending, given Donald Trump‘s policies, the United States dollar‘s decline, and the fact that so far this year the U.S. stock market is underperforming its international rivals by the widest margin since 1987.

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The surprise, however, is that despite the shocks emanating from Washington and the Middle East, U.S. stocks are still grinding higher. And so are U.S. bond prices, despite the exploding U.S. deficit. American market performance is less exceptional because the rest of the world is rising, not because the U.S. is declining.

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Many dismiss this resilience as mindless optimism and argue that U.S. stocks will soon succumb to the “gloomcycle” of 2025. But in my experience, when the disconnect between commentators and markets is this wide, the message from the markets is usually more correct. So, it’s worth trying to figure out what the markets may be sensing.

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U.S. stocks seem to be floating along at historically high valuations on data continuing to show that Trump’s policies have yet to impact inflation or growth in any meaningful way. The big fear was that his ever-evolving tariffs would drive up inflation and slow growth. Instead, inflation has remained lower and growth higher than the consensus forecasts. Tariff revenue is starting to show up in the Treasury coffers but not much in consumer prices, for reasons that are a bit mysterious; are foreign suppliers absorbing the costs, or maybe U.S. firms are running down existing inventory?

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One way or another, U.S. corporations have yet to suffer a significant hit to earnings. Most forecasters are still calling for earnings growth to slow (to under eight per cent), inflation to rise (to around three per cent) and GDP growth to fall (to around 1.5 per cent) by the second half of this year. But the market is brushing off these projections, too.

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U.S. corporations are buying back their own stock at a near-record pace of US$4 billion a day. American retail investors are all in, buying at an unusually aggressive pace this year. Roughly half of U.S. household wealth is now invested in stocks — breaking the record set during the dotcom bubble of 2000. Though small investors are often said to represent “dumb money,” their faith is paying off so far. To the old line — never bet against the U.S. consumer — might be added a new twist. Never bet against the U.S. retail investor.

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Meanwhile foreigners are not staging a significant retreat from U.S. stocks or bonds despite being under threat from new taxes on remittances and foreign investment, deportations, and more. This is starting to look like a marriage that survives on inertia and fear of what might come with change.

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As in past bear markets, including the one in the 2000s, the decline of the dollar in recent months has been seen as an orderly adjustment after a long period of overvaluation — not as a sign that America is having trouble funding its large deficits.

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Had it been clear last year that instead of falling as expected, U.S. deficits would continue trending up towards a new peak — possibly close to seven per cent of GDP — most analysts would have predicted a bond market riot. Instead, the response has been muted, with bond yields declining marginally this year.