The prolonged trend of US stock market outperformance could be nearing its end in 2025, according to Rockefeller International Chairman, Ruchir Sharma. Sharma suggests that growing investor concern over the escalating US national debt may be the catalyst for this shift.
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Sharma, in a recent Financial Times op-ed, expressed his belief that US equities could soon underperform their global counterparts. He estimates that leading US stocks might lag the global market by approximately 10% in the coming year, a stark contrast to their 20% outperformance in 2024. This potential downturn represents a significant shift in market dynamics and could have substantial implications for investors. “Momentum investing looks poised to crash in a way that could hit many investors hard,” Sharma cautioned.
Unsustainable US Stock Market Momentum
In a subsequent CNBC interview, Sharma highlighted several factors contributing to this potentially unsustainable trend. He pointed to persistently high valuations in the US market, coupled with overly optimistic investor sentiment compared to other global regions. He emphasized the disproportionate size of the US stock market relative to the US economy. While the US economy constitutes about 30% of the global economy, US stocks represent a staggering 70% of the global equity market. Despite this disparity, a prevailing consensus among investors anticipates continued US outperformance.
Ruchir Sharma, the chairman of Rockefeller International
“I’ve never seen such strong groupthink prevail,” Sharma remarked, noting the widespread belief in continued US stock market dominance, a strengthening US dollar, and the ongoing AI-driven tech boom. He expressed skepticism about this prevailing sentiment, stating, “I’d be shocked if the groupthink is so right as it is now with its strong conviction of US outperformance.”
The Looming Threat of US National Debt
Sharma posits that the turning point for US stock performance could coincide with increased market focus on the country’s burgeoning national debt, which currently exceeds $36 trillion. He argues that the US has enjoyed a “free pass” on its high borrowing levels due to the dollar’s status as the world’s reserve currency. However, with a surge in long-dated US Treasury bonds expected to enter the market, investors might begin to “punish” the US for its fiscal deficits, leading to weakened demand in future Treasury auctions.
Chart of the US debt ceiling
This phenomenon of “bond-market vigilantes”—investors who exert pressure on governments to adopt fiscal discipline by selling off or refusing to purchase government bonds—has already emerged in countries like Brazil and France. “There’s no country in the world today running a deficit number like the US is running, and that has been artificially propping up growth,” Sharma warned, identifying debt as the primary trigger that could halt the US momentum trade.
A Potential Market Correction on the Horizon?
Sharma’s warning echoes his previous concerns about a significant stock market correction. Last month, he described the US market as being in the “mother of all bubbles,” contrasting with the generally optimistic outlook for 2025 among Wall Street analysts. While many predict another positive year for stocks, Sharma’s analysis suggests a potential turning point driven by the unsustainable US debt levels and a shift in investor sentiment.
Conclusion: A Call for Caution
The potential for a shift in global market leadership underscores the importance of a diversified investment strategy. While the US stock market has enjoyed a prolonged period of dominance, Sharma’s insights suggest a need for caution and a reevaluation of portfolio allocations in light of the growing risks associated with US debt levels. Investors should closely monitor developments in the US economy and the bond market for signs of a potential shift in momentum.
