US exceptionalism: Fading force or enduring edge?

US exceptionalism—long supported by strong consumer spending, technological innovation, and geopolitical influence—is now being tested by fading fiscal stimulus, rising global competition, and demographic shifts. For investors, this shifting landscape underscores the importance of diversification and selectivity.

The foundation of US exceptionalism

The concept of US exceptionalism has shaped both domestic narratives and international perceptions of the United States for generations. At its core, US exceptionalism refers to the belief that the United States possesses a distinct and enduring advantage on the world stage—an edge that sets it apart from other nations in terms of influence, innovation, and leadership.

US exceptionalism dates back to the post-World War II era, when the United States emerged as a dominant global power with unmatched military strength, a resilient economy, and dynamic institutions that fostered stability and growth. The US played a pivotal role in rebuilding war-torn regions and helped establish an international order that governed global relations for decades.

Over that time, the US leveraged the privileged status of the US dollar (USD) as the world’s reserve currency, its strategic geopolitical influence, and a thriving entrepreneurial ecosystem to shape international norms and the global economic framework.

In recent years, outsized fiscal stimulus, ultra-low interest rates, and aggressive offshoring and globalization have further amplified US exceptionalism. These tailwinds have supported superior earnings and GDP growth, along with high valuations across US assets.

Big picture, US exceptionalism has been supported by:

• Structural and economic factors. Strong consumer spending has been a key driver of the US economy in recent years. American households consistently outspend their counterparts in other developed economies. This goes hand in hand with a robust labor market and favorable demographics, both of which are entwined with the US’ legacy as a country of immigrants, which supports geographic mobility and a relatively large working-age population.
• Innovation and technology. Deep and liquid capital markets make the US a preferred destination for global investors. A strong startup ecosystem and a risk-taking mindset foster innovation, while ample funding supports the growth of emerging industries. These traits underpin US leadership in AI, software, semiconductors, and platform companies—embodied by the Mag 7. High levels of public and private R&D investment, along with world-class universities, further reinforce this advantage.
• Geopolitical and global Influence. The US continues to lead in global policymaking, supported by its military strength. Both hard power and soft power—especially through cultural exports in the form of media, education, and tech—have shaped global norms and preferences.

Figure 1: Three dimensions of US exceptionalism

Source: State Street Investment Management, September 12, 2025.

While these broad, deeply rooted foundations are unlikely to erode quickly, recent structural shifts have begun to unsettle investors.

Threats put US exceptionalism at a crossroads

Of the many forces threatening to weaken US economic outperformance over the next five to 10 years, these are the most significant:

• Fading fiscal stimulus and end of ultra-low interest rates
• “America First” policies that erode trust in the US as a reliable global partner
• Rising global competition in innovation, particularly from China and Europe
• AI narrowing gap in productivity and valuation between the US and other regions

Notably, the current vulnerability of the main tenets of US exceptionalism will likely change as US policy develops and other countries respond.

These threats will be shaped by shifts in:

• Consumer spending: Tariffs on imports (currently between 10-15% on average with a few notable exceptions including China, India, and Brazil) are raising consumer prices, which could erode spending power and trigger inflation.
• Labor market: Immigration crackdowns are reducing labor supply, especially in sectors reliant on foreign-born workers, which could constrain growth and productivity.
• Demographics: Net migration has turned negative for the first time in decades, with 1.4 million fewer foreign-born US residents. This undermines population growth and long-term labor force expansion. Notably, US birth rates remain below replacement so without a reversion to positive net immigration, the US population will decline in the long run.
• Free market advocacy: Despite the rhetoric, the Trump administration’s policies—tariffs, industrial subsidies, and selective antitrust enforcement—reflect economic nationalism more than free-market principles.

Continued support for US exceptionalism

At the same time, some current developments are positive—or at least net neutral—for US exceptionalism. These include:

• Deregulation tailwinds and R&D investment: At the nexus of the US growth story are the rapid innovations in AI, cloud computing, and semiconductors. US structural advantages are most compelling in technology and innovation-led sectors. For example, AI could significantly modernize the US Health Care sector—nearly one-fifth of its economy.
• Emphasis on entrepreneurial culture: A strong investing culture, flexible labor markets, and business-friendly regulatory frameworks continue to attract global capital.
• Low-cost energy prioritization: President Trump’s plans for lowering the cost of energy have yet to fully take shape, but the administration continues to signal it’s a priority.

Notably, these drivers also remain critical to US corporates maintaining superior margins and capital efficiency.

How to position for US exceptionalism’s uncertain future

With US exceptionalism at a crossroads, the global economic outlook has grown increasingly opaque—and for investors, more nuanced. The threats to US exceptionalism don’t clearly favor either US equities or bonds across the board. Instead, they amplify market dispersion and elevate the importance of selectivity. In this environment, investors may benefit from:

• Diversifying across geographies and asset classes
• Monitoring policy developments and innovation trends
• Considering defensive assets like cash, gold, and alternative investments to build portfolio resilience
• Monitoring FX and rate dynamics closely and reassess currency hedging strategies

As we head into a busy year end and refine our own long-term forecasts, we remind investors that in a time of heightened uncertainty, it’s important to prepare for a broader range of outcomes.