Has US exceptionalism peaked?

By Jacobus Lacock, Multi-Asset Portfolio Manager & Macro Strategist, and Sevashen Thaver, Multi-Asset Analyst 

 Market performance YTD: A shift from 2024 

Two months into 2025, the question emerges: Has US exceptionalism peaked? The YTD market performance contrasts sharply with 2024. Last year, US equities, particularly large tech stocks, performed exceptionally well, with the S&P 500 returning 25%, led by the “Magnificent 7” at 70%. However, performance was highly concentrated, as the equal-weighted S&P 500 returned around 13%. The South African Capped SWIX Index also returned around 13%. Locally, retailers, financials, property, and bonds performed well post-election, while resources struggled. 

 This year, US equities have underperformed. Large tech stocks and the Nasdaq have lagged, while the S&P 500 has posted only marginal gains. In contrast, European and Chinese equities have delivered double-digit returns. South African equities have also outperformed the US, driven by resources, gold stocks, and Naspers/Prosus. However, local retailers, financials, property, and bonds have struggled. 

Broader market observations  

Several trends have emerged in 2025. Commodities, including copper, gold, platinum, and palladium, have rallied as global manufacturing improves. In the US, TIPS have outperformed government bonds, reflecting rising inflation concerns, while US government bonds have outperformed equities, signalling investor caution. 

On the currency front, the South African rand has strengthened despite negative headlines, while the US dollar has weakened.  

Has US exceptionalism peaked? 

Some factors suggest investors may be shifting away from the US, and a key theme for 2025 may be that US equities underperform relative to lofty expectations, while Europe and China have surprised to the upside. Several indicators support this shift: 

1. Technology competition: China’s AI model DeepSeek R1 was developed at a lower cost than its US counterparts, challenging US AI dominance. 
2. Policy uncertainty: A shifting US policy environment has dented investor confidence. 
3. Weakening macro data: Retail sales, PMI services, housing data, and consumer confidence have all weakened this year, driving US bond yields and the dollar lower. 

Positive catalysts for Europe and China 

Germany’s market-friendly election could lead to reduced regulation and increased fiscal spending. A potential Russia-Ukraine ceasefire could lower energy prices, boost real incomes and corporate profits, and encourage European Central Bank rate cuts, improving investor sentiment. In China, early signs of property market stabilisation and Xi Jinping’s support for the technology sector suggest further pro-growth policies. 

 South Africa: A defensive play amid uncertainty 

Despite negative headlines, South Africa has remained relatively defensive in 2025. The rand has strengthened, and the postponed Budget Speech had little impact on local assets. Fiscal consolidation is expected to remain a key focus in the postponed Budget Speech, with targets for a primary budget surplus, a reduced deficit (3.2%), and a peak debt-to-GDP ratio of 76.1%. The postponed 12 March Budget Speech is expected to reinforce these efforts. 

There is clear intent to increase infrastructure and services spending, but the key question remains: Is the country focused enough on cutting unproductive spending? The final budget may include compromises between the DA and ANC, potentially limiting the VAT hike, increasing spending cuts, and easing certain business regulations.