For a quarter of a century American exceptionalism delivered extraordinary results. US markets have outperformed global competitors by roughly 3% annually, a compounding effect that has left the rest of the world as much as 50% behind over the period. But there are seven emerging high-risk threats that could sabotage that track record of outperformance.
Recent events, from military intervention in Venezuela to threats to take over Greenland by force, have strained relations with traditional allies, raising questions about whether these challenges to sovereignty could erode the superpower status of the US.
As Martin Wolf has written in the Financial Times: “What we are observing is the slow-motion erasure of the operating systems of the global economic and political order.” The rules in financial markets are changing, and strategies that worked up to now may need to be adjusted.
The burning question for investors isn’t whether the US faces challenges, but whether the foundations supporting that dominance are as solid as they once were. Looking at the pillars of American hegemony, we believe there are seven high-risk areas.
Labour market flexibility: This has historically been a competitive advantage. However, the current US immigration policy raises concerns, particularly about highly skilled workers. The administration suggests AI and robotics will address labour gaps, but will it have the skilled labour to sustain advances?
The annual H-1B visa cap of 100,000 makes it harder for companies to bring in AI talent. This could constrain America’s technological competitive edge and its global primacy.
Reserve currency status: There’s an ongoing debate over the dollar’s role as a reserve currency. Some argue America sees this as a burden because a strong dollar makes exports less competitive. But reserve currency status delivers real benefits: materially lower borrowing costs and considerable leverage across the financial system.
The pressing risk isn’t that America would abandon this role, but that recent policy actions could gradually erode the trust required to maintain it. While China lacks the institutional framework to challenge dollar dominance in the near term, confidence can erode at the margins.
Trusted borrower status: America’s standing as a reliable borrower is under unprecedented scrutiny. There’s been talk, though not action, of selective approaches to servicing foreign debt or withholding payments. While this might have domestic political appeal, the economic logic points in the opposite direction. Alienating major creditors in Europe, Japan or China would raise America’s cost of capital, even as fiscal requirements remain pressing. Bond markets have kept this in check, but the risk bears monitoring.
Pax Americana: America’s role underwriting the post-war order has never been about pure altruism. It has served American interests through stable trade routes, predictable frameworks and peaceful dispute resolution. When security commitments appear more conditional, allies naturally reassess assumptions about American reliability.
One could argue these are temporary features tied to a particular administration. The key question is whether this represents an episodic shift or something more structural that persists beyond current leadership. Given 80 years of strategic consistency, any sustained change matters considerably.
Technology and AI leadership: This picture presents interesting statistics. China accounts for about 60% of AI-related patents, compared with America’s 20%. China’s science, technology, engineering and mathematics (Stem) doctorate output is roughly double that of the US — 30,000 annually versus 15,000.
Perhaps most telling, by 2050 China projects 400GW of spare energy capacity, enough to fuel enormous AI and data centre needs, while the US currently projects none. Nvidia’s CEO has suggested China might win the AI race due to energy subsidies, state co-ordination and lighter regulatory frameworks. It is therefore not a foregone conclusion the US will maintain its lead.
Energy deployment: Energy security represents one of the US’s clearer advantages; it has considerable energy resources at competitive prices. But there’s a gap between having energy and deploying it strategically. If AI infrastructure requiring huge energy inputs is built elsewhere, the advantage becomes academic. The question is how effectively energy is channelled into economically relevant applications.
Fiscal stability: While substantial, America’s debt-to-GDP ratio isn’t especially alarming compared with other developed economies. Bond markets remain reasonably sanguine. That said, the combination of spending ambitions, tax policy and political reluctance to make difficult choices creates long-term vulnerability. Consumer balance sheets and demographics provide near-term support, but these could erode without productivity growth and fiscal discipline.
Broader context
What’s notable is the convergence of these potentially structural vulnerabilities. Military capability, capital market depth, research universities and entrepreneurial culture remain substantial strengths. But when immigration policy potentially constrains talent flows, when alliance commitments appear conditional, when technological leadership faces genuine competition from state-directed economies like China, and when fiscal policy favours near-term priorities, foundations tend to gradually weaken even while the structure appears intact.
For now there isn’t a compelling alternative. Europe struggles with productivity gaps, energy costs triple those in the US and regulatory burdens that account for 44% of manufacturing output, compared with 15% in the US. China, despite deploying more than $250bn through its Belt and Road Initiative last year, faces significant headwinds, from property sector challenges to youth unemployment of 25%-30%.
The world is in a period of heightened uncertainty. Mohamed El-Erian, a well-known economic commentator and former CEO of Pimco, coined the term “Vuca” to describe the current investment environment: volatility, uncertainty, chaos and ambiguity. There are many questions we don’t have answers to, and if you don’t have the answers, the wisest path is to diversify further.
American exceptionalism hasn’t ended, but investors can no longer assume it will continue as before. They are best advised to closely monitor structural risks and adjust their investment strategies accordingly.
• Wainer is CEO of Stonehage Fleming Investment Management.
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