Paradigm Shift: How the Economic Center of Gravity is Changing After a Century of American Leadership
This note is being written after the close on April 7th, which ostensibly saw a quiet day after stocks finished the day just modestly lower (in stark contrast to the turmoil of April 3 & 4). However, those closing levels are hiding a remarkable level of intraday volatility, including the largest single intraday swing since 2008 (which was catalyzed by an inaccurate tweet from an anonymous account that CNBC and other outlets reported as fact until the White House denied it). Much like a person flailing their arms after they’ve been knocked off balance, this price action is indicative of a global stock market struggling to find its footing. Unexpectedly severe tariff policy is undoubtedly the catalyst for this volatility, but in our view this is merely an acceleration of a larger shift in global economics that was already underway.
Before getting into what that shift looks like, it’s worth noting we do not see the U.S. or the USD being wholly replaced by China, the EU, or any other global entity. However, we do think the nature of the global economy’s relationship with the U.S. is changing, and that this change will continue even if the tariffs are ultimately reversed.
It has become increasingly clear that President Trump’s heavy handed tariff policies are resulting in an acute deceleration in U.S. economic activity. The tariffs themselves are essentially a $750B tax on U.S. businesses in aggregate, but beyond that they are damaging sentiment and putting business investment plans on hold. A slowdown or even outright recession in the United States appears to be in motion. But the more pressing and less understood question is whether the rest of the world can diverge from this trajectory.
We believe we’re in the early stages of a long-term shift in global policy. For the last century, the U.S. has provided the world’s reserve currency as well as blanket military protection for the western world, which in turn facilitated a large and persistent trade deficit. As China, Europe and the rest of the world sold more goods to a seemingly insatiable American consumer, international exporters then recycled those dollars into investments in U.S. assets. This cycle has acted as the world’s circulatory system for the last 100 years, with the U.S. benefiting from massive levels of capital to fund new ventures and innovation – this is a significant reason why virtually all of the world’s largest companies (so-called megacap) are American. However, COVID lockdowns were the first sign that this arrangement hasn’t been universally positive for Americans – with so much of the country’s industrial capacity having being shipped overseas, supply chain disruptions left Americans and the West feeling exposed.
The downside is that bringing industrial capacity back to the U.S. will not be painless or cheap – if it was, it would’ve already happened through normal profit-seeking behavior. What’s happening now is that President Trump is accelerating this shift in a rapid and disorderly manner. The outcome of this divergence will hinge on the depth of the U.S. downturn. But for the first time in many cycles, there is a credible scenario in which non-U.S. economies can continue to grow or even accelerate despite American weakness.
While it’s premature to assume a full decoupling, it’s equally dangerous to expect the status quo – that a U.S. recession must necessarily lead to a global one. What’s changed is not just the cyclicality of demand, but the willingness and capacity of major non-U.S. governments to pursue aggressive fiscal spending. For the first time in recent memory, we are seeing a structural pivot: the U.S. is pulling back on deficits (both fiscal and trade), while other leading economies – particularly Europe, Japan, and China – are pressing forward.
Just three months ago, market consensus was that the U.S. was the lone bright spot in a sea of structural underperformers. This belief pushed U.S. stock valuations to historically elevated levels, driven by superior earnings growth and an expectation that this would continue indefinitely. But it’s worth recalling a basic accounting identity: the government’s deficit is the private sector’s credit. With U.S. deficits now set to contract while global deficits expand, we expect a relative deceleration in U.S. earnings growth – not just in absolute terms, but on a rate-of-change basis versus global peers.
What we’re experiencing is not merely a market correction, but a potentially structural repricing of future economic leadership.
With this in mind, it’s helpful to revisit the playbook from 2022. During that cycle, both U.S. and global equities corrected sharply. But as the federal government deployed sweeping fiscal stimulus – most notably the Inflation Reduction Act and the CHIPS Act – the domestic economy rebounded, and U.S. equities returned to their leadership position. Today, we see a similar situation unfolding in reverse: this time, it’s the rest of the world leading the rebound, underpinned by broad fiscal stimulus from countries such as Germany and China.
We believe investors should take caution when assuming that the dominance of the U.S. market remains unassailable. Structural change often begins imperceptibly before accelerating as market consensus catches up. For the first time in a generation, we may be witnessing the early stages of such a shift.
In recent months, we’ve gradually repositioned portfolios to reflect this new environment—trimming exposure to high-growth, rate-sensitive sectors, and emphasizing quality businesses with strong balance sheets and sustainable cash flows, with many of these businesses residing outside the U.S.
To be clear, markets will almost certainly remain volatile in the near term, with Trump’s comments acting as the market’s fulcrum. But we must remember that panic selling into a downturn has historically been a costly mistake.
In these moments, our role is not only to manage your capital prudently, but also to help you see through the fog. While that fog is virtually opaque in the near term, the picture becomes clearer the further out you look. As portfolio managers, we can’t eliminate broad market declines, but we can and must ensure that your portfolio is resilient, diversified, and well-positioned for new opportunities. As always, our focus remains on identifying these inflection points before they become consensus.
We will continue to monitor developments closely, adjust exposure when warranted, and communicate transparently with you throughout this process. If you have any questions or would like to discuss your portfolio in greater detail, we’re always here.