OPINION:
When President Trump’s post-election stock market rally nearly turned into a bear market, financial commentators speculated about the demise of American exceptionalism, the superior U.S. economic and equities performance that started following the global financial crisis of 2008.
Some data points
During the Bush-Obama years, the U.S. economy grew 1.9% annually — in line with economists’ expectations for sustainable growth without accelerating inflation.
In 2016, the federal budget deficit was 3.1% of GDP. Then President Trump cut taxes and increased defense spending, President Joe Biden spent on infrastructure, semiconductors and clean energy and expanded Medicaid, and the deficit jumped to 6.4%.
All that Keynesian stimulus drove unemployment below 4% and economic growth averaged 2.5%, a record no other major advanced industrialized country can rival.
Since 2008, U.S. equities have been on a tear. Those recovered well from the global financial crisis, primarily driven by powerhouse technology stocks and, post-COVID-19, especially by the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Nvidia, Microsoft and Tesla).
U.S. stocks have outperformed their peers abroad by wide margins. The share of U.S. equities in the MSCI World Index jumped from 47% in 2008 to 71% in May, as foreign pension funds, sovereign wealth funds and ordinary folks poured into American stocks, corporate bonds and government securities.
China and American isolationist impulses are the challenges to exceptionalism
Trump’s reelection ignited optimism.
Businesses expected pro-growth tax cuts, deregulation and a tougher posture on trade toward China were to enable continued strong growth. Breakthroughs in artificial intelligence promised a significant boost to productivity and profits through the creation and deployment of AI agents.
Instead, Mr. Trump started a 360-degree global trade war that is radically disrupting supply chains for automobiles and other industries. DeepSeek and China’s forays into AI agents burst onto the scene, casting doubt about American AI dominance.
After stocks powered to a record high on Feb. 19, they fell into a 10% correction by March 13. The fact that 22 of the last 34 corrections have preceded bear markets was disquieting.
Investors began considering other places for their money. For example, European equities owing to optimism about the continent’s defense buildup and fixed income investments with interest rates expected to remain elevated.
The $64 question is, were Mr. Trump to stabilize his tariffs and accomplish a rapprochement with North America and European alliance partners, would the tax cuts and additional spending passed by Congress lift the economy to new heights and continue American leadership among global equities?
In 2023 and 2024, the Magnificent 7 stocks gained 156% against just 58% for the overall S&P 500, because U.S. competitive advantages are narrowing to mostly high-tech, finance and petroleum as China gains technological leadership in a widening array of industries.
Similarly, any Trump reversal on tariffs is not likely permanent.
Going forward, power likely will alternate between progressive and populist politicians with protectionist bents until Americans reconcile to the fact that those huge investments undertaken by Big Tech are premised on global revenues, not just sales in U.S. markets.
Returning to 19th-century protectionism to live in isolated splendor is not an option; it’s economic suicide.
As the limiting consequences of America’s flirtation with isolationism sinks into investors’ consciousness, they won’t be pouring quite so much money into U.S. equities, and will look for opportunities to diversify more elsewhere.
Limiting immigration and discouraging foreign investment
From 2020 to 2024, 5 million legal and illegal immigrants were added to the labor force, enabling Mr. Biden’s big spending to power above trend growth.
Going forward, curbs on legal immigration, tougher border enforcement, deportations and slower indigenous population growth will constrain U.S. workforce and economic growth.
The Trump administration’s attacks on the press, law firms and judges that compromise the rule of law, breaking trust with Canada and Mexico on free trade and casting doubt on our security commitments to NATO allies raise questions about political risk for foreign investors in the United States.
Visitors to the United States increasingly face arbitrary treatment and detention by immigration officers, and foreign governments have issued travel warnings.
All those somewhat limit the foreign investments that Mr. Trump promises will build new factories and create jobs to enable America’s new golden age.
U.S. stocks have regained footing but won’t excel
If Republicans in Congress or the fear of another stock market route don’t temper Mr. Trump’s more radical impulses, voters may.
Midterm elections or even special elections to fill vacant GOP seats could easily flip the House, end Mr. Trump’s monopoly on power and force a course adjustment.
Over the next several years, the economy will grow — but not likely at the torrid pace of the first Trump and Biden administrations. U.S. equities will prosper, but those likely won’t be posting outsize gains or dominating global equity markets quite as much as they did before the turbulence of Trump 2.0.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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