By Joseph Quinlan and Lauren Sanfilipp
The world economy is becoming more closed than opened, more fractured than integrated, and more bound than unbound. Globalization is in remission, while its opposite, isolationism, is being rekindled by nationalists around the world, including in the U.S.
The comeback of isolationism will help determine asset prices and returns for the reminder of the decade, and beyond. In this new era, portfolio construction must reckon with rising geopolitical risks and attendant policy preferences, including trade tariffs, government subsidies, investment restrictions, anti-immigration initiatives, resource protectionism, and domestically focused industrial policies. Yes, market fundamentals matter to market returns, but investors must now discount the fact that nationalism (security) trumps economic efficiencies (profits).
Most at risk will be open, trade-dependent economies across Europe, Asia, and much of the emerging market universe. These states are the most exposed to an inward-looking world losing its appetite for cross-border commerce. This is a key reason investors remain lukewarm on the export-oriented markets of Europe among the developed markets and in the emerging world.
In contrast, the preference for—and outperformance of—U.S. equities remains in place in part due to the simple fact that no country is better disposed toward economic autocracy and isolationism than the U.S.
America’s relatively self-contained, continent-size economy is more closed than open. U.S. exports of goods and services accounted for just 11% of U.S. gross domestic product in 2023. At the other end of the spectrum are such nations as the Netherlands, where exports account for 112% of GDP, Germany (48%), and South Korea (44%).
Consumers drive the U.S. economy. They not only account for roughly 70% of U.S. GDP but also a staggering 31.5% of overall global personal consumption, according to figures from the U.N. Annual consumption levels in the U.S. are greater than the next six nations combined.
America’s unrivaled consumption power gives it an economic hedge in a world in retreat. Another hedge is U.S. geographic bounty. To name just two assets, the Great Plains are the largest continuous mass of arable land in the world, while the Great Lakes are the largest group of freshwater lakes on earth.
U.S. farmers are among the most productive in the world. Hence, what U.S. consumers spent on food in 2022 (6.7% of total expenditures) was the lowest percentage on the planet. Similarly, no country produces more crude oil than the U.S., which helps explain why energy costs in America are much lower relative to Europe, Japan, and China, all net energy importers.
Other U.S. strategic advantages include a technology sector that is among the most dynamic and innovative in the world; deep and sophisticated capital markets, which, along with the U.S. dollar, help grease the wheels of commerce at home; and the world’s most powerful military, which translates into relatively secure borders.
Even at the corporate level, U.S. firms are better suited for a more isolationist world. Yes, U.S. multinationals are at risk of rising trade and investment barriers. However, it’s worth noting that a U.S. multinational is composed of a U.S. parent and its foreign affiliate. Of these two entities, U.S. parents account for the bulk of multinationals’ activities. That is, their operations are more U.S.-centric than global. U.S. parents account for 68.3% of worldwide employment by U.S. multinationals, 76% of worldwide output, 81% of worldwide capital investment, and 86% of all worldwide R&D expenditures, according to the Bureau of Economic Analysis.
In other words, the operations of U.S. multinationals reflect “America first, rest of the world second.” They are hedged in a retrenching world.
All of the above gives the incoming administration an overwhelmingly strong hand to play, relative to the rest of the world. We have what the world wants.
However, the continued outperformance of U.S. equities will depend in part on how deftly the next administration deploys the tools at its disposal. U.S. tariffs on Chinese imports, for instance, could be met by even more Chinese export restrictions on key metals and minerals deemed critical yet in short supply in the U.S.
A more nationalist America also puts at risk the large foreign-capital inflows required to fund America’s perennial federal savings gap. For decades, the U.S. savings deficit has been offset by importing the world’s excess capital surplus. Foreign ownership of U.S. securities totaled a whopping $30.1 trillion in the third quarter of 2024. Should these inflows diminish, America’s isolation will come with some pain and sacrifice. The same can be said if U.S. disengagement creates a world of disorder that undermines growth in Europe, the Middle East, and Asia. The effects would ultimately ripple back to U.S. shores.
Still, if there were ever an economy built for isolation, it is the United States. If the nation does become a global dropout and opts for retrenchment, the world will become a messier place, but with the U.S. still on top. Stay long America.
About the authors: Joseph Quinlan is the chief market strategist for Merrill and Private Bank, Bank of America. Lauren Sanfilippo is a senior investment strategist at Bank of America.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Censational Market.
