Undimmed US 'exceptionalism' seems improbable
Few doubt a de-escalation of Washington's trade war - for the next month or two at least - defused a panic. The over-caffeinated waxing and waning of recession warnings speaks to that even if U.S. import tariffs are rising regardless.
But the re-inflation of extreme relative U.S. equity valuations can only be warranted if U.S. 'exceptionalism' is truly unscathed. And here's where the story seems improbable, especially if you assume the administration's stated goal of upending the status quo that existed prior to its term.
Business as usual is not part of the policy design.
On the face of it, the S&P 500 (.SPX), opens new tab is back in positive territory for the year for the first time since February, remarkably less than 4% from its all-time high from February. The VIX 'fear index' of equity volatility has subsided to the lowest since March and back below its long-term average.
And before you think that's all just a mega-cap tech rebound, the equal-weighted S&P 500 (.EWGSPC), opens new tab is also back in the black for the year too. Both had been down 12-15% for the year shortly before April 8's 90-day pause on the draconian 'reciprocal tariff' plan of a week earlier.
There are several reality checks to that, however.
The tech-heavy Nasdaq (.IXIC), opens new tab, small-cap Russell 2000 (.RUT), opens new tab and exchange-traded funds in so-called Magnificent Seven top caps remain in the red for 2025 to the tune of 2% to 6%.
More crucially, the S&P 500 itself is still underperforming MSCI's all-country index (.MIWD00000PUS), opens new tab by some 3% for the year so far. And, with the dollar (.DXY), opens new tab down about 6%, it lags Germany's DAX (.GDAXI), opens new tab, the broader euro zone (.STOXXE), opens new tab benchmark and Hong Kong's Hang Seng (.HSI), opens new tab by anywhere between 15-30% in dollar terms for 2025.
But it's the valuation rebound that arguably causes most puzzlement with so much of the economic and policy disturbance left unresolved.
The S&P 500's 12-month forward price/earnings multiple has jumped back above 20.
Although still off February heady peaks over 22, it continues to surf almost 20% above its own 30-year average, more than 40% above equivalent European STOXX 600 (.STOXX), opens new tab valuation and more than 60% above the MSCI emerging markets index (.MISCIEF), opens new tab and Britain's FTSE 100 (.FTSE), opens new tab.
That still spells exceptional in most people's books and has to assume those revised U.S. recession warnings remain under wraps and 'value investors' don't get tempted away, or back home, in the case of the trillions of overseas dollars in the market.
"Those with sympathy for the MAGA ambitions and methods could believe U.S. exceptionalism will continue to deliver high returns, with strong capital inflows representing a willingness to hold and increase dollar holdings amongst investors in the rest of the world," mused Chris Iggo at AXA Investment Managers.
"Recent events might cast some doubts on those assumptions."
Iggo wrote that the only meaningful factor that had improved of late was sentiment and relief, driven in part by announcements of billions of dollars in deals done by President Trump on his Middle East tour last week.
"Sentiment is fickle though. It could turn sour when the reality of weakening economic data becomes evident," he added.
As to whether U.S. market pricing remains extreme, Iggo cast back to legendary investor Warren Buffett's indicator of excessive valuation being defined by how much overall market cap exceeds a country's GDP.
Using the Wilshire 5000 (.FTW5000), opens new tab as a measure, U.S. equity market cap is now more than 200% of GDP - twice where it was a decade ago, twice that of France or Britain and more than 50% bigger than the same ratio for Japan.
Even if U.S. recession is avoided, the overarching Trump plan to rebalance world trade with higher tariffs, narrower U.S. deficits, a countervailing capital flow reversal, weaker dollar and domestic demand spurs overseas challenge that market exception.
Some point to enduring long-term themes of U.S. tech leadership and innovation.
But even if faith in that persists, the current disruption has multiple hurdles over the summer ahead.
July and August stand out as particularly tricky months.
Ninety-day tariff pauses on global and Chinese tariff hikes expire in July, the 180-day review of U.S. membership of all multilateral institutions comes up that month too and the deadline for raising the U.S. debt ceiling drifts back onto the radar amid currently fraught budget negotiations.
On top of that, the Federal Reserve's best guess on when tariff rises start to infect inflation in earnest is June - numbers set to be published in July.
And even in most investors' best-case scenario of "only" a 10% universal tariff increase, the risk there is that it resolves little.
"Settling on a 10 percent tariff might ... be the worst of all worlds—from the perspective of Trump's objectives," wrote Council on Foreign Relations President Michael Froman. "It could be too low to raise substantial revenue, too high to avoid pushing up prices, but not high enough to re-industrialize the United States."
The opinions expressed here are those of the author, a columnist for Reuters
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
The Independent
an hour ago
- The Independent
Hong Kong's CK Hutchison seeks Chinese investor to join Panama Ports deal
A Hong Kong conglomerate that's selling ports at the Panama Canal said Monday it may seek a Chinese investor to join a consortium of buyers, a move that could please Beijing but bring more U.S. scrutiny to the geopolitically fraught deal. CK Hutchison Holdings' initial plan to sell its port assets to a group that includes U.S. investment firm BlackRock Inc. pleased President Donald Trump, who has alleged that China interferes with the critical shipping lane's operations in Panama. However, they apparently angered Beijing and drew a review from Chinese anti-monopoly authorities. A Beijing-backed newspaper posted scathing commentaries about the deal, with one describing it as a betrayal of all Chinese. Beijing's offices overseeing Hong Kong affairs have reposted some of these commentaries, widely seen as an indication of Chinese leaders' stance. A Hutchison subsidiary has operated ports at both ends of the Panama Canal since 1997. After months of uncertainty brought by tensions between Washington and Beijing, Hutchison said in a statement that the exclusive negotiations period with the consortium has expired. However, it added 'the Group remains in discussions with members of the consortium with a view to inviting major strategic investor from the PRC to join as a significant member of the consortium,' referring to the People's Republic of China. It said they needed to change the membership of the consortium and the structure of the transaction for the deal to be able to pass reviews by 'all relevant authorities." The awkward position Hutchison found itself in for months highlights the challenges Hong Kong business elites face in navigating Beijing's expectations of national loyalty, especially when relations between China and the United States are strained. Hong Kong has overhauled its electoral system to ensure the city is run by 'patriots.' CK Hutchison is owned by the family of Hong Kong's richest man, Li Ka-shing. It announced March 4 that it would sell all its shares in Hutchison Port Holdings and in Hutchison Port Group Holdings to the consortium that also includes BlackRock subsidiary Global Infrastructure Partners and Terminal Investment Limited, a subsidiary of the Mediterranean Shipping Company. In May, Hutchinson co-managing director, Dominic Lai told shareholders that Terminal Investment was the main investor. Its parent company is led by Italian shipping scion Diego Aponte, whose family reportedly has a longstanding relationship with Li's. The initial deal, valued at nearly $23 billion including $5 billion in debt, would have given the consortium control over 43 ports in 23 countries, including the ports of Balboa and Cristobal, located at either end of the canal. That agreement also required approval from Panama's government. The deadline for their exclusive negotiation period ended on July 27.
Reuters
an hour ago
- Reuters
US, China to launch new talks on tariff truce extension, easing path for Trump-Xi meeting
STOCKHOLM, July 28 (Reuters) - Top U.S. and Chinese economic officials will resume talks in Stockholm on Monday to try to tackle longstanding economic disputes at the centre of a trade war between the world's top two economies, aiming to extend a truce by three months and keeping sharply higher tariffs at bay. China is facing an August 12 deadline to reach a durable tariff agreement with President Donald Trump's administration, after Beijing and Washington reached preliminary deals in May and June to end weeks of escalating tit-for-tat tariffs and a cut-off of rare earth minerals. Without an agreement, global supply chains could face renewed turmoil from U.S. duties snapping back to triple-digit levels that would amount to a bilateral trade embargo. The Stockholm talks come hot on the heels of Trump's biggest trade deal yet with the European Union on Sunday for a 15% tariff on most EU goods exports to the U.S., including autos. The bloc will also buy $750 billion worth of American energy and make $600 billion worth of U.S. investments in coming years. No similar breakthrough is expected in the U.S.-China talks but trade analysts said that another 90-day extension of a tariff and export control truce struck in mid-May was likely. An extension of that length would prevent further escalation and facilitate planning for a potential meeting between Trump and Chinese President Xi Jinping in late October or early November. A U.S. Treasury spokesperson declined comment on a South China Morning Post report quoting unnamed sources as saying the two sides would refrain from introducing new tariffs or other steps that could escalate the trade war for another 90 days. Trump's administration is poised to impose new sectoral tariffs that will impact China within weeks, including on semiconductors, pharmaceuticals, ship-to-shore cranes and other products. "We're very close to a deal with China. We really sort of made a deal with China, but we'll see how that goes," Trump told reporters on Sunday before European Commission President Ursula von der Leyen struck their tariff deal. Previous U.S.-China trade talks in Geneva and London in May and June focused on bringing U.S. and Chinese retaliatory tariffs down from triple-digit levels and restoring the flow of rare earth minerals halted by China and Nvidia's (NVDA.O), opens new tab H20 AI chips and other goods halted by the United States. So far, the talks have not delved into broader economic issues. They include U.S. complaints that China's state-led, export-driven model is flooding world markets with cheap goods, and Beijing's complaints that U.S. national security export controls on tech goods seek to stunt Chinese growth. "Geneva and London were really just about trying to get the relationship back on track so that they could, at some point, actually negotiate about the issues which animate the disagreement between the countries in the first place," said Scott Kennedy, a China economics expert at the Center for Strategic and International Studies in Washington. "I'd be surprised if there is an early harvest on some of these things but an extension of the ceasefire for another 90 days seems to be the most likely outcome," Kennedy said. U.S. Treasury Secretary Scott Bessent has already flagged a deadline extension and has said he wants China to rebalance its economy away from exports to more domestic consumption -- a decades-long goal for U.S. policymakers. Analysts say the U.S.-China negotiations are far more complex than those with other Asian countries and will require more time. China's grip on the global market for rare earth minerals and magnets, used in everything from military hardware to car windshield wiper motors, has proved to be an effective leverage point on U.S. industries. In the background of the talks is speculation about a possible meeting between Trump and Xi in late October. Trump has said he will decide soon on a landmark trip to China, and a new flare-up of tariffs and export controls would likely derail planning. Sun Chenghao, a fellow at Tsinghua University's Center for International Security and Strategy in Beijing, said that a Trump-Xi summit would be an opportunity for the U.S. to lower the 20% tariffs on Chinese goods related to fentanyl. In exchange, he said the Chinese side could make good on its 2020 pledge to increase purchases of U.S. farm products and other goods. "The future prospect of the heads of state summit is very beneficial to the negotiations because everyone wants to reach an agreement or pave the way in advance," Sun said. Still, China will likely request a reduction of multi-layered U.S. tariffs totaling 55% on most goods and further easing of U.S. high-tech export controls, analysts said. Beijing has argued that such purchases would help reduce the U.S. trade deficit with China, which reached $295.5 billion in 2024.
Reuters
2 hours ago
- Reuters
Eroding protections for public lands
'Public lands have tremendous bipartisan support in the state,' Lawson said in reference to her home state of Montana, about 30% of which is federal public land. 'Everybody from the wilderness advocates who want public land preserved in perpetuity to the hunters and anglers to the OHV (off-highway vehicle) Jeepers. Everybody loves public lands. Access to those public lands is so integral to daily life.' Deep budget and staffing cuts to the U.S. National Forest Service, National Park Service and Bureau of Land Management could affect their ability to effectively care for these lands at a time when they are experiencing record numbers of visitors. Last year, national parks welcomed more than 332 million visitors, a new high, up 6 million from 2023. The National Park System has lost 24% of its permanent staff since Trump returned to office in January, according to the National Parks Conservation Association, a watchdog advocacy group. The association attributes much of the drop to job cuts and staff taking buyouts offered by Trump's administration. And, the National Forest Service cut about 10% of its workforce as part of the administration's campaign to reduce spending. This legislation that Trump signed also rescinded funding for conservation and climate resilience projects in national parks and Bureau of Land Management land that was provided in a law signed by his predecessor Joe Biden called the Inflation Reduction Act. 'Unleashing America's economic potential goes hand-in-hand with preserving our public lands, as years of mismanagement, regulatory overreach and neglect of routine management have hindered outdoor recreation opportunities,' the White House said in a statement to Reuters. Leshy said budget and staffing cuts could be a strategic move by U.S. officials who have long wanted to dispose of public land, pointing to Russell Vought, director of the White House Office of Management and Budget and a force behind the Project 2025 initiative that laid out a conservative blueprint for reshaping the U.S. government. 'I think they've decided, looking at the opinion polls, that it's not popular and it's not wise to press for outright selling off or disposing, transferring federal lands. So what they're doing instead is hollowing out their management, is slashing their budgets and slashing the personnel,' Leshy said. 'The aim is, 'Let's make federal management so bad and so dismal that it will change public opinion,'' Leshy added.
