Seventy years ago the then Federal Reserve Chairman, William McChesney Martin, coined the phrase “taking away the punch bowl just as the party gets going”. Not many parties feature a punch bowl these days, but American equity markets still know how to let their hair down – and on Trump’s election most investors seemed to think he was going to break into his YMCA dance and join in.

What followed, although well telegraphed by the 78-year-old, came as a surprise to those cracking open Budweisers in the kitchen.

Since the shock of ‘Liberation Day’, the tariff concessions have been piling up and market anxiety has eased. The VIX index is almost back to where it was before tariffs were announced. The S&P 500 has begun to recover.

Time to buy US stocks again?

Is the era of US exceptionalism over and the expensive dollar a busted flush? US companies are still the best in the world, but they are expensive even after the decline, and while the dollar remains the world’s reserve currency, investors outside the US might want to revisit the thinking that has underpinned most portfolios for the past decade.

In that time the US has absorbed most of the world’s excess savings, sending its stock market and the dollar rising. By nearly any measure, leading US equities look extremely expensive even with the recent falls. The US market started the year representing 65%¹ of global benchmarks yet with only 4% of the global population². It is hard to believe that back in 2011 it was less than 45% of global indices³. (The UK accounted for about 8%⁴ of the global market back then – now it is about 3.4%.⁵)

US exceptionalism in market cap

US as % MSCI ACWI market cap

A new global order is redirecting capital flows away from the US

It seems clear to me that most investors have too much in dollar-denominated assets. It is understandable. “Money goes where it gets treated well” and money got treated well in the US. If you had gone anywhere else in the past decade you would have underperformed.

But if you started with a clean sheet of paper, would you have 65% of your wealth in the US today? If you are an asset allocator in Copenhagen or Madrid or Mexico or Canada, do you really want two-thirds of your assets in a currency that is so expensive?

Domestic stimulus in Europe and elsewhere is changing the game

US equities trade at twice the price-to-earnings (P/E) multiple of European equities⁶, which is a lot. Some of it can be explained by better growth, higher quality earnings and superior margins. But some of these characteristics are a result of globalisation, lower cost of capital and being beneficiaries of many of the trends we have witnessed since the Global Financial Crisis.

Now Trump has triggered a New World Order – focused on rebuilding home bias. In the US that means onshoring production to create work for Americans. But it will mean that excess savings outside of the US are less likely now to flow to America to finance excessive consumption and ever-growing share buybacks, profits and share prices.

If Germany is about to spend hundreds of billions of euros on stimulating its economy, the government will want to ensure the money goes to German workers, working for German companies and paying tax in Germany. This kind of domestic fiscal stimulus will have a different impact on financial assets than the more broad-based blunt quantitative easing and low-rate policy of the past 15 years. Capital and capital flows have become weaponised.

The days of the US absorbing global savings may be over

In all the rhetoric, Trump has forgotten that, while the US has a current-account deficit with most of the world, for each product Americans bought in China the Chinese would buy Treasuries, S&P ETFs or private equity and private credit, thereby artificially lowering the cost of capital for US companies and the US government. Not anymore – or at least, less so.

Maybe the tariff regime will roll back if Trump loses the mid-terms. The pressure for a more balanced equilibrium is building. We have seen something as dull as eurozone telecoms rise 25%⁷ in US dollars this year, while Apple is down 20%⁸. On the wider markets the S&P is down 3.5%⁹ but European equities are up 16%¹⁰. Who said you can’t have global rebalancing without a global bear market?

Investors may take this as an opportunity to reduce US exposure

I think we are going to see savings – corporate, private and government – redirected in different ways. Few people were positioned for this, and they will ask themselves many questions before returning to where things were. Many are still heavily overweight towards the US and may take any recovery as a chance to start rebalancing.

I am quite comfortable still running with a big US underweight – the Artemis Global Income Fund went into this with less than 30% there. I really do not want to be standing in front of these flows when the tide turns.

US companies may retain their premium, but the overvaluation is hard to ignore

US exceptionalism is not going to change overnight. US shares should trade at a premium. But that does not mean they – or the dollar – should be as overvalued as they were (and still are). By common valuation methods, even with the recent falls, US equities still look 25% to 30% overvalued. The dollar could come down 20% before being considered ‘fair’ value or ‘cheap’.

As capital flows shift, being underweight the US could prove prudent

Markets are still discussing how much of Trump’s messaging is negotiation, how much is reversible and how much of it is paving the way for an acceleration of the changing direction of capital flows. But his recent announcement on film tariffs suggests he is not ready to retreat on this agenda.

For the past few years investing in the US has been like playing musical chairs – everyone dancing, knowing that at some point the music would stop and the chairs would disappear. Trump seems to be taking the chairs away and the punchbowl is looking low. The party could be over. Is this a good time to be grabbing your coat?