In the last couple of years, the idea that the U.S. economy and its stock market were surpassing other advanced nations gained prominence, being seen as a new version of American exceptionalism. The Economist even went so far as to declare the U.S. economy as the “envy of the world” last October, stressing that it had left other wealthy countries far behind.

The arrival of a president who claimed to be pro-business and the Republican victory in the elections last November added to the belief that America’s economy and stock markets would stand out in 2025, particularly when compared to a Europe perceived as stagnant and a slow-moving China.

However, the initial optimism for a Trump administration boost to economic growth, largely based on anticipated deregulation and tax cuts, has faltered due to increased policy uncertainty and protective measures affecting consumer and business confidence.

Changes in the Trump administration’s foreign policy approach and its inconsistent implementation of economic threats and trade tariffs have shifted the global order towards a more transactional model, prompting key European and Asian economies to enact reforms and stimulus measures that were long overdue.

Although the U.S. economy ended last year on a positive note, it is expected to face challenges this year due to rising policy uncertainty, declining consumer confidence, delayed business investments, and a weakening job market.

The bond market’s sudden and significant shift, following a surge of 100 basis-points between mid-September 2024 and mid-January 2025, indicates a dramatic change in market sentiment, with fears of an economic slowdown now surpassing concerns about persistent inflation.

The recent underperformance of U.S. stocks suggests that previously optimistic investors are reevaluating their bullish outlook on American equities. Surprisingly, the once overlooked and relatively undervalued Asian and European stock indices have outperformed their American counterparts this year.

To better understand recent developments, it is important to analyze the factors behind the recent “U.S. exceptionalism.” Since 2019, the U.S. economy has outperformed its G7 advanced economy peers significantly, partly due to extensive fiscal stimulus implemented between 2020 and 2024.

Not only does the U.S. have inherent strengths in regulatory frameworks, productivity, demographics, and a vibrant tech sector compared to European nations, but the shale revolution has made it the leading global producer of oil and gas, shielding its economy from external energy shocks.

Although the Ukraine conflict and the subsequent reduction in Russian energy supply to Germany and its neighbors impacted European consumers and producers more severely than their American counterparts, the U.S. government’s robust fiscal interventions sustained consumption and investment levels while mitigating the impact of higher interest rates.

European nations, on the other hand, implemented smaller initial stimulus packages and enforced fiscal austerity in 2023 and 2024, contributing to the Euro Area’s underperformance.

Even the remarkable decade-long outperformance of the U.S. equity market appears to be at risk, with U.S. equities accounting for nearly 70% of the MSCI AC World Index and a top-heavy distribution among the top 10 stocks in the S&P 500, raising concerns about being overvalued and overowned, as stated by Ruchir Sharma in December.

Recent developments have led global investors to question the stability of the “U.S. exceptionalism” theory, particularly with China’s advancements in AI challenging Silicon Valley and their efforts to boost domestic consumption and shield themselves from tariff impacts. Additionally, Germany’s shifts in policy and increased spending expectations have sparked gains in European stock markets and currencies.

The Trump administration’s disruptive policymaking approach has compelled other countries to undertake necessary reforms to reduce their reliance on the American consumer and financial system, potentially reshaping global economic dynamics.

Vivekanand Jayakumar, Ph.D., is an economics associate professor at the University of Tampa.