But the bedrock of America’s exceptionalism has long been the United States’s size and stability, making it a safe harbor for assets in time of global turmoil.
“There’s a growing sense that we’re now on a turbulent but sustained path towards de-escalation,” wrote Deutsche Bank economist Jim Reid in a note this morning seen by Fortune. “Even if the U.S. administration remain hawkish on trade, we have already seen there are limits to that approach, particularly in the face of market turmoil and declining approval ratings for President Trump.
“So although we think there’s likely to be prolonged uncertainty and a notable slowdown in U.S. growth over H2, the de-escalation so far will support growth relative to earlier expectations.”
That being said, “a lot of collateral damage has already been done.”
The past few months have been bumpy for markets to say the least, as they have responded to rapidly changing policy with some of America’s key trading and military partners.
To quickly recap the past few months, President Trump entered the Oval Office and threatened tariffs on Mexico, Canada and China to push the nations to curb immigration and the flow of fentanyl. Tariffs on Canada and Mexico were briefly paused before coming into effect around a month later.
In early April President Trump shocked markets by announcing tariffs at the more extreme end of the spectrum, with a 10% universal hike on imports as well as hefty increases on the likes of the EU and China—all in the name of rebalancing trade. China responded with its own measures, promoting a tit-for-tat price war which saw import tariffs on Chinese goods hit 145%.
Trump then delayed the majority of Liberation Day tariffs and axed all sanctions to 10% for 90 days, though he recently threatened and then re-paused import hikes on the EU of 50%.
As such, Reid writes: “Our outlook argues that the structural foundations of U.S. exceptionalism—particularly the ability to finance itself cheaply via the dollar’s reserve status—have begun to erode. So we remain structurally bearish on the dollar and expect U.S. term premia to keep rising.”
While knocks to U.S. exceptionalism may impact confidence in longer term views, Reid does point to a short-term boon for investors: Risk. The very fact that America could potentially be seen as less of a safety net could offer greater returns to those willing to take chances.
Viktor Shvets, head of global desk strategy at Macquarie Capital, also believes American exceptionalism is eroding, but added: “We believe that it is a process not a collapse, creating environment of a gradual rise in U.S. risk premia and avoidance of disorderly asset re-pricing. Investors will continue narrowing spreads between U.S. and non-U.S. assets, supporting EMU and Japan.”
In the note shared with Fortune yesterday, Shvets adds Macquarie is still cautious on China’s ability to grow, but added he expects to see the nation’s risk premia to decline.
Questions of American exceptionalism aside, you’d be hard-pressed to find an analyst who (even despite current foreign policy volatility) would outright bet against the success of the U.S.
He added: “The United States still is the most prosperous, innovative nation on the planet. That’s not going to change.”
That being said, it seems some of the most notable names on Wall Street are still concerned by the long-term damage to sentiments the White House’s policy may have inflicted.
Speaking during Semafor’s World Economy Summit earlier this year, he added: “On the financial markets, no brand can compare to the brand of the U.S. Treasuries…we put that brand at risk.”
