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Deeper than Tariffs: Positioning for a New Investment Regime

27 June 2025

5 min read

Robertas Stancikas, CFA| Investment Strategist—Institutional Solutions

Inigo Fraser Jenkins| Co-Head—Institutional Solutions

Macro and market changes reach well beyond tariffs—what’s next for investors?

The first few months of 2025 have seen a generational shift in the geopolitical and economic frame of reference. Tariff policy has understandably been the investment industry’s immediate focus, but the change goes much deeper. Recent policy announcements have accelerated the transition to a new investment regime of lower growth and more volatility, driven by the interlinked issues of defense, the dollar, trade and debt. Fundamentally, this amounts to a new geopolitical and economic order, and a reduction in trust toward the US is testing global investors’ willingness to buy US assets.

The extremely changeable nature of policy is likely to make equity markets more volatile in the near term, but we believe investors should look beyond that and focus on the strategic case for equities. Even though the investment environment is less supportive than it was during the previous four decades, a lower-growth, higher-inflation world means that investors face a greater need for allocations that can deliver positive real returns. In our view, the global equity market is the largest real asset, and a sizable stock allocation should remain an integral part of investors’ portfolios.

Revisiting the Strategic Case for US Exceptionalism

This year, we’ve heard the opinion voiced several times that “US exceptionalism is dead.” We disagree. The US has certainly been exceptional when it comes to equity flows and valuation. This is not a happy combination for bearish investors: it implies that a loss of exceptionalism means that the market has a long way to fall.

The US still far outpaces other regions in cumulative equity flows over the past few years (Display). This creates potential for more near-term outflows from US equities, given that the near-term growth outlook has declined abruptly and that valuation multiples are still near historic highs. However, we don’t think the cumulative flow difference between US and non-US equities necessarily needs to reverse.

US Is Still Far Ahead in Cumulative Equity Flows

Cumulative Regional Equity Fund Flows (USD Billion)

Cumulative Regional Equity Fund Flows Since 2013

Current analysis does not guarantee future results.
January 1, 2013, through June 18, 2025
Source: Emerging Portfolio Fund Research Global and AllianceBernstein (AB)

Valuation does matter, and it implies a drag on US performance versus that of the rest of the world over the medium to long term. But growth matters, too. Over the last 30 years, the relative performance of regions has been determined mainly by relative earnings growth. Put another way, underweighting the US strategically would be to implicitly forecast that US earnings growth will trail the rest of the world’s earnings growth.

We don’t think that’s likely. As we see it, the case for superior earnings growth in the US rests on the strategic case for US exceptionalism:

A relatively favorable demographic outlook versus that of other developed economies and China; growth in the US working-age population is set to decline but remain positive, whereas other regions are in outright contraction
A structurally higher level of profitability for US companies and a successful tech sector imply an ongoing ability to earn higher margins
Stronger geographic security of supply chains than that of other regions, with an energy supply unmatched by other major economic regions such as Europe, China and Japan
Benefits from the sheer scale of the US home-investment market
The dollar’s status as the world’s reserve currency

The Case for Weakening of US Exceptionalism

We do see a case to be made for US exceptionalism weakening in the outlook for US sovereign bonds and the dollar. For one thing, US fiscal sustainability—a longtime concern—has become more worrisome over the last year. The Congressional Budget Office projects that the country’s debt burden as a percentage of gross domestic product (GDP) will exceed 150% by 2050 (Display).

The US Government’s Debt Burden Is Expected to Mount

US Government Debt-to-GDP Ratio (Percent)

The US Government’s Debt-to-GDP Ratio Since 1940

Current analysis and projections do not guarantee future results.
The Congressional Budget Office (CBO) projection represents data that supplement the CBO’s March 2025 report, The Long-Term Budget Outlook: 2025 to 2055.
Through April 3, 2025
Source: CBO and AB

We don’t see an explicit debt/GDP level that’s problematic per se, but a rising ratio poses the risk of an exogenous shock causing a surge in bond yields. This risk should be a feature of high-debt governments when interest rates no longer trend endlessly downward. Interest expense as a share of government spending poses more of a threat, in our view. US debt service exceeded the country’s defense budget in 2024 for the first time in modern history.

Over long horizons, we believe that letting inflation run higher to reduce the real value of debt will likely be preferable to a more aggressive action, such as sharply raising taxes or cutting government spending. An outlook for structurally higher and more volatile inflation, in our opinion, creates a challenge for US nominal duration bonds, so we think investors should consider inflation-protected securities.

Mar-a-Lago, Debt and the US Dollar

Along with debt sustainability, a second concern about US exceptionalism is any potential change in US policy that would hurt foreign bondholders specifically. In our view, both of these concerns are reason to consider hedging more US dollar exposure.

We raised the possibility of negative actions against global bondholders with a putative Mar-a-Lago Accord as a successor to the 1985 Plaza Accord—the international agreement devaluing the dollar. Another recent example is the Section 899 provision in the One Big Beautiful Bill Act that would impose higher taxes on countries deemed to have “unfair foreign tax regimes.” While it’s unclear if any of these measures will be implemented, the extreme policy uncertainty erodes investors’ trust in the US and hastens their desire to look for US dollar and US sovereign-bond alternatives.

While there’s no near-term prospect of an alternative to challenge the dollar’s reserve status, we see a case for a directional move away from it. Any decline of trust in the US implies less willingness to hold dollars. Moreover, trade is predominantly dollar-denominated, so a significant trade decline stemming from US tariffs and policy uncertainty creates less demand for global investors to hold dollars. The result is our view that the dollar’s outlook is directionally more negative and would be less of a safe-haven hedge.

The reason to hedge more dollar exposure now really rests on the notion that among the potential negative outcomes, around policy announcements at least, more of them seem to chart a path that would be negative for risk assets and the dollar at the same time.

Defensive Assets to Balance Exposure to Stocks

With stocks likely to remain a critical allocation for investors seeking to outpace inflation, what investments could serve as defensive counterparts?

If government bonds become somewhat less effective at de-risking and diversifying, broader exposures should come into play. These could include private assets and factor exposures—low volatility, in our assessment, has generally been effective. Active strategies are also worth considering, as is exposure to investment-grade credit—not for its relative value but in place of some US Treasury holdings.

Gold has performed very well through the trade turmoil, and we see a place for it, given that its correlation with equities has historically been zero—even at higher inflation levels. Demand for gold from central banks seems likely to stay robust, and all G7 economies carry high-debt burdens, so inflation or letting currencies weaken against gold could become attractive policy paths.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams, and are subject to change over time.

About the Authors

Robertas Stancikas, CFA

Robertas Stancikas is a VP/Director and Investment Strategist on the Institutional Solutions team at AB. He was previously a Senior Research Associate on the Global Quantitative Strategy team at Bernstein Research. Prior to joining AB in 2015, Stancikas was part of Nomura Securities’s Global Quantitative Strategy and European Equity Strategy teams. He holds a BSc in economics and industrial organization from the University of Warwick and is a CFA charterholder. Location: New York

Inigo Fraser Jenkins

Inigo Fraser Jenkins is Co-Head of Institutional Solutions at AB. He was previously head of Global Quantitative Strategy at Bernstein Research. Prior to joining Bernstein in 2015, Fraser Jenkins headed Nomura's Global Quantitative Strategy and European Equity Strategy teams after holding the position of European quantitative strategist at Lehman Brothers. He began his career at the Bank of England. Fraser Jenkins holds a BSc in physics from Imperial College London, an MSc in history and philosophy of science from the London School of Economics and Political Science, and an MSc in finance from Imperial College London. Location: London

Deeper than Tariffs: Positioning for a New Investment Regime

Revisiting the Strategic Case for US Exceptionalism

The Case for Weakening of US Exceptionalism

Mar-a-Lago, Debt and the US Dollar

Defensive Assets to Balance Exposure to Stocks

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