Podcast Summary: "Is American Market Dominance Over?"

Title: Thoughts on the Market
Host/Author: Morgan Stanley
Episode: Is American Market Dominance Over?
Release Date: July 30, 2025
Duration: Approximately 11 minutes

Introduction

In the inaugural episode of a two-part series titled "Is American Market Dominance Over?", hosts Andrew Sheets, Head of Corporate Credit Research, and Lisa Shallet, Chief Investment Officer for Morgan Stanley Wealth Management, delve into the enduring question of American exceptionalism. This episode sets the stage for a comprehensive exploration of the factors that have underpinned the United States' market dominance and examines whether this supremacy is facing its twilight.

The Thesis of American Exceptionalism

Andrew Sheets opens the discussion by highlighting the recurring theme of American exceptionalism—a term that encapsulates the decades-long outperformance of the U.S. economy, currency, and stock market. He references Lisa Shallet's recent publication, "American Navigating the Great Rebalancing," as a cornerstone for their conversation.

Lisa Shallet elaborates on the foundational pillars supporting American exceptionalism. She states:

“They’ll point to America as an economy of innovation, a market with regulation and capital markets, breadth and depth and liquidity, market guided by, you know, laws and regulation, and a market where, you know, heretofore we've had relatively decent population growth, all things that tend to lead to growth.”
— Lisa Shallet (01:01)

Shallet emphasizes that while these pillars have historically driven U.S. growth, the past 15 years have introduced unprecedented variables that challenge the sustainability of this dominance.

The Great Rebalancing: Overview

The term "Great Rebalancing" refers to the significant shifts occurring in global economic dynamics. Shallet explains:

“The profound outperformance, as you noted, Andrew, of both the US Dollar and American stock markets have left the world at an extraordinarily overweight position to the dollar and to American assets.”
— Lisa Shallet (03:04)

She underscores that the U.S. holds a substantial share of global GDP and profits, coupled with high valuation premiums in equity markets. This imbalance raises questions about the longevity of such premiums, especially as key support systems like fiscal stimulus, monetary policy, and globalization reach critical junctures.

Factors Leading to Potential Shift in Market Dynamics

A significant portion of the episode focuses on the factors that have propelled the U.S. market's exceptional performance and how changes in these areas might signal a shift.

Monetary and Fiscal Policy

Shallet attributes much of the U.S. market's recent success to extraordinary monetary and fiscal measures:

“An extraordinary responsiveness of the Fed to any crisis. Secondly, extraordinary fiscal policy and fiscal stimulus and third, the peak of globalization...”
— Lisa Shallet (02:53)

She suggests that the previously advantageous rate spreads and hedging ratios that favored U.S. assets are now at an inflection point. As other nations pivot towards "America first" policies, they are likely to bolster their own investments in defense, infrastructure, and technology, potentially narrowing the growth and rate differentials that once heavily favored the U.S.

Deglobalization and Its Implications

The conversation transitions to the waning trend of globalization, which has historically been a significant tailwind for U.S. corporations. Shallet remarks:

“In a world of tariffs, in a world of de globalization, in a world of, of create manufacturing jobs onshore, where that gets reversed a bit and there's going to be a financial cost to that.”
— Lisa Shallet (06:09)

She articulates that the dismantling of global supply chains, once optimized for cost-efficiency and profit margins, will entail financial repercussions for American companies. The shift towards onshoring manufacturing and increased tariffs may erode the previously low-cost advantage, thereby impacting corporate margins.

Sustainability of US Market Outperformance

Addressing the crux of whether American exceptionalism can sustain its stellar performance, Shallet offers a balanced perspective:

“Our thesis has been this isn't the end of American exceptionalism point blank, black and white. What we've said, however, is that we think that the order of magnitude of that outperformance is what's going to close...”
— Lisa Shallet (07:37)

She clarifies that while U.S. assets will continue to play a pivotal role in investment portfolios and may still experience growth, the unprecedented levels of outperformance witnessed over the past 15 years are unlikely to continue. The magnitude of returns is expected to moderate as growth is hampered by emerging headwinds.

Social and Economic Inequality as Market Drivers

The episode also touches upon the growing social and economic inequalities exacerbated by past monetary and fiscal policies. Shallet explains:

“When we applied this degree of monetary and fiscal stimulus, what we essentially did was massively deleverage the private sector of America.”
— Lisa Shallet (08:46)

This surge in stimulus has widened the gap between the financially secure and those more sensitive to interest rate fluctuations. Shallet posits that this disparity presents an economic policy conundrum, questioning whether a singular central bank policy can effectively address the diverse needs of the U.S. economy. She muses:

“Is there one central bank policy that's right for the US economy?... I don't see the constraints.”
— Lisa Shallet (09:16)

This section highlights how internal economic imbalances and inequality could influence future market stability and performance.

Conclusion

As the episode draws to a close, Sheets and Shallet summarize their exploration of American market dominance's potential decline. They acknowledge that while the era of unbridled U.S. outperformance may be waning, the foundational strengths of the American economy remain intact. The realignment of global economic policies, coupled with internal challenges like inequality, signals a new phase of market dynamics that investors must navigate carefully.

Sheets concludes:

“That brings us to the end of part one of this two part look at American exceptionalism and the impact on equity and fixed income markets.”
— Andrew Sheets (10:56)

Listeners are teased with the promise that the subsequent episode will delve deeper into the fixed income aspects of this debate.

Key Takeaways

1. American Exceptionalism Reexamined: While the U.S. has enjoyed prolonged market dominance, recent shifts in monetary policy, fiscal stimulus, and globalization are challenging its sustainability.
2. Great Rebalancing: The current overvaluation of U.S. assets may correct as global economies adjust to more protectionist and investment-heavy policies.
3. Deglobalization Impacts: The reversal of optimized global supply chains could pressure U.S. corporate margins and alter investment landscapes.
4. Market Future: U.S. assets will likely remain important in portfolios, but the scale of their outperformance is expected to normalize.
5. Economic Inequality: Growing disparities pose significant challenges to economic stability and may influence future market performance.

Notable Quotes

• “They’ll point to America as an economy of innovation, a market with regulation and capital markets, breadth and depth and liquidity...”
  — Lisa Shallet (01:01)

• “The profound outperformance... have left the world at an extraordinarily overweight position to the dollar and to American assets.”
  — Lisa Shallet (03:04)

• “In a world of tariffs, in a world of de globalization... there's going to be a financial cost to that.”
  — Lisa Shallet (06:09)

• “Our thesis has been this isn't the end of American exceptionalism... but the order of magnitude of that outperformance is what's going to close.”
  — Lisa Shallet (07:37)

• “Is there one central bank policy that's right for the US economy?... I don't see the constraints.”
  — Lisa Shallet (09:16)

This episode of "Thoughts on the Market" provides investors with a nuanced analysis of the shifting tides in global economics and their implications for American market dominance. As the series progresses, listeners can anticipate a deeper dive into how these dynamics will influence both equity and fixed income markets.