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Is this the end of US exceptionalism?
Marc Stacey, Senior Portfolio Manager for Investment Grade, discusses how investors who look at a global opportunity set can add value and reap potential rewards.
Key takeaways:
- Political uncertainty, fiscal expansion and shifting trade rhetoric are prompting a reassessment of US risk.
- Recent events have shown that the world’s largest economy cannot take market confidence for granted. This was underlined by Moody’s’ decision to downgrade the US sovereign credit rating.
- US credit still represents a large and liquid market, but for many investors, it may no longer be the obvious starting point it once appeared and the scope to add value is expanding.
There’s an old saying in financial markets – “When Wall Street sneezes, the world catches a cold”. For decades, US markets have been the epicentre of global investing, setting the pace, direction and tone for risk appetite everywhere else. However, in 2025, that gravitational pull may be weakening.
Confidence in the US – economically, fiscally and politically – is starting to fray. Trade policy is increasingly erratic. The fiscal trajectory is unclear. Markets have already responded with volatility, and investors are questioning whether the US can still offer the clarity and stability that once set it apart.
The cracks are starting to show
Political uncertainty, fiscal expansion and shifting trade rhetoric are prompting a reassessment of US risk. After the so-called “Liberation Day” tariff announcements triggered a broad market correction, the US administration softened its stance, pausing implementation and entering negotiations with key trade partners. More recently, court challenges have thrown fresh uncertainty over whether the proposed measures can be implemented at all.
Meanwhile, a disappointing Treasury auction in May highlighted investor unease at the scale of America’s unfunded spending plans – and, more broadly, at the lack of policy clarity. Though subsequent auctions have been better received, the episode served as a reminder that even the world’s largest economy cannot take market confidence for granted. That point was underlined by Moody’s’ decision to downgrade the US sovereign credit rating – a move that reflects mounting concern over persistent deficits and an expanding debt burden.
Europe in the ascendancy
In credit markets, that shift in sentiment is beginning to be evident in the data. As the chart below illustrates, US spreads have widened relative to European peers. US credit still represents a large and liquid market, but for many investors, it may no longer be the obvious starting point it once appeared.
The end of US exceptionalism?
Source: Bloomberg, BofA index data, as at 31 March 2025.
Excess return is the return for holding corporate bonds over the return for underlying bunds.
European credit, by contrast, is quietly gathering momentum. While global policy uncertainty remains in the background, there are early signs of improving economic sentiment in Europe, supported by a more proactive policy approach. Germany’s plans for a significant fiscal expansion – marking a departure from its traditionally conservative stance – have been welcomed by markets. Defence budgets are rising across the region too, with European NATO members stepping up spending commitments. Together, these shifts point to a more constructive growth outlook than many had anticipated.
Crucially, spreads in Europe have tightened, even in the face of the macro noise. That compression reflects improving fundamentals but also a growing awareness that Europe may now offer a more attractive hunting ground for credit investors.
A more global opportunity set
This divergence in spreads – with European yields tightening even as US spreads widen – reflects a broader reappraisal by global investors. As confidence in US policy clarity wanes, capital is starting to flow towards markets where valuations and policy signals appear more supportive.
We believe this may have further to run. Our portfolios already reflect a view that the European opportunity set is becoming more attractive. Our investment grade credit strategies are increasingly underweight the US, in favour of Europe.
When Wall Street sneezes…
The winds of change are currently blowing through financial markets, but it may still be too early to decisively call the end of US exceptionalism. Nevertheless, the fact that we – and many other investors – are even calling it into question is significant. The US still plays a central role in global markets. However, the automatic assumption of American leadership that has been in place for so long – across policy, economic management and financial markets – is looking increasingly challenged.
The old adage mentioned above that “When Wall Street sneezes, the world catches cold” is also being doubted. Wall Street has clearly sneezed this year, but so far, the rest of the world looks surprisingly healthy. Investors appear increasingly well immunised to Wall Street’s viral reflexes. Not completely indifferent, but more selective in their response.
For those willing to embrace a more global opportunity set in investment grade credit, therefore, the scope to add value is expanding.
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