The concept of "American exceptionalism" has long been a driving force in the US economy and stock market. However, since Donald Trump's presidential election win, this notion has been put to the test. Initially, investors were optimistic about the prospect of the US economy outperforming other advanced economies, with Oxford Economics declaring that "American exceptionalism will endure." Bank of America also noted that the "American exceptionalism" trade was gaining momentum, driven by the potential return of "America First" policies under Trump.

However, this enthusiasm was short-lived. The US stock market, which was expected to thrive under Trump's presidency, has instead become a laggard. The S&P 500 index has dropped by over 3% since Trump took office, while the FTSE all-world index excluding US stocks has risen by 7%. Stock indexes for Europe, China, Hong Kong, and even Mexico have outperformed the S&P 500, leaving investors wondering if the "American exceptionalism" trade is still viable.

One of the primary reasons for this decline is Trump's escalating trade war and the imposition of tariffs on imports from key trading partners, including Canada, Mexico, and China. These tariffs have been met with retaliation from affected countries, leading to a rise in costs for US importers and consumers. According to the Peterson Institute for International Economics, the new tariffs could raise the cost of produce, gasoline, automobiles, and other goods by $1,200 per year for the typical family. This has led to a decline in consumer confidence, with Americans expecting Trump's tariffs to make inflation worse.

Experts such as David Rosenberg of Rosenberg Research have compared Trump's economic policies to those of Herbert Hoover, the president who came into office in 1929 near a stock market peak, only to flail as the Great Depression got underway. Rosenberg warns that "the easy money in equities has been made" and that Trump's policies may have damaging consequences for the economy. Yardeni Research has also raised its recession odds from 20% to 35% in light of Trump's tariffs and executive orders. As Terry Haines of Pangaea Policy notes, "it's a mistake for markets to think Trump might 'blink' on tariffs," suggesting that the president is unlikely to back down on his trade policies.

As the US economy continues to show signs of cracking, with retail spending falling and hiring slowing sharply, investors are becoming increasingly cautious. While some, such as Tom Lee of Fundstrat, believe that the current downturn is a contained "growth scare" that can be remedied by easing up on tariffs or resuming interest rate cuts, others are more pessimistic. With the world being a turbulent place, and America being no exception, it remains to be seen how Trump's policies will ultimately impact the US economy and stock market. One thing is certain, however: the "American exceptionalism" trade is no longer the sure bet it once was.