Bank of America: The U.S. exception theory is evolving into a global rebalancing, with Chinese assets expected to lead the rally

U.S. Bank Chief Investment Strategist Michael Hartnett stated in his latest research report released on Friday that U.S. trade policies are fostering a “new world order”—investors are abandoning the dollar and U.S. stocks in favor of international assets.

He wrote in the report that the Trump administration’s overheated economic policies are giving rise to a new ABD trade—“anything but dollar.” In this context, American exceptionalism is evolving into a global rebalancing.

Hartnett pointed out that this will boost international stock markets, and commodity-producing emerging markets are also expected to benefit from increased demand driven by artificial intelligence. He also noted that investor allocations to Chinese and Indian assets remain insufficient.

Fund flows confirm Hartnett’s view. According to a Bank of America report citing EPFR Global data, this year European, Japanese, and other developed market equity funds have absorbed a total of $104 billion, far exceeding the $25 billion inflow into U.S. equity funds.

Since Trump announced historic tariffs in April, U.S. assets have experienced volatility, and concerns about the end of U.S. dominance in the global economy and financial markets have intensified.

Major Asset Rotation: Historical Patterns and Future Trends

Hartnett also stated in his research that over the past 50 years, every major political, geopolitical, and financial event has triggered significant shifts in the leading asset classes:

1971: Collapse of the Bretton Woods system, start of stagflation era, oil crisis, end of the “Beautiful 50” bull market… The new long-term leading assets were gold and physical assets (417% increase from 1971-1980), while bonds and financial assets underperformed (only 67% growth during the same period).

1980: Reagan/Thatcher/Volcker policies implemented, inflation peaked (March 1980 inflation rate reached 14.8%), government intervention peaked… Long-term leading asset was bonds (from 1980-1985, 10-year U.S. Treasury yields fell from 16% to 6%).

1989: Fall of the Berlin Wall, start of globalization, deflationary trends emerged… Long-term leading asset was U.S. stocks (by 1989, U.S. stocks relative to global valuations hit a 75-year low), commodities underperformed (copper was the only asset in the 1990s with negative annual returns).

2001: 9/11 attacks, China joins WTO, era of “China and BRICS rising” begins… The dollar and tech stocks underperformed, while emerging markets and commodities led gains; financial and resource sectors also strengthened.

2009: Global financial crisis, start of quantitative easing, stock buybacks became market mainstays… The new long-term leading assets were U.S. stocks (with a 10-year rolling return hitting a 90-year low in February 2009), private equity, and growth stocks (from 2008-2020, the market cap share of tech/telecom/healthcare in MSCI Global rose from 24% to 44%, while financial/oil/commodity sectors declined from 44% to 20%).

2020: COVID-19 pandemic outbreak, unprecedented monetary easing (QE) and fiscal stimulus (U.S. government spending increased by 56%), nominal GDP surged over 50%, the idea of American exceptionalism reemerged… Leading assets included gold, the “Seven Giants,” and Japanese and European bank stocks (end of deflation); bonds (30-year U.S. Treasuries from 2020-2023 fell 50%) underperformed.

Future Major Asset Rotation: Core Predictions

Bank of America believes the next long-term leading assets will be emerging market stocks and small-cap stocks.

U.S. Large-Cap Growth Stocks → U.S. Small-Cap Value Stocks:

The market trend is shifting from elitism to populism, from free-market capitalism to government intervention, from services to manufacturing, from globalization to localization… Small-cap stocks related to the general public are outperforming Wall Street’s large caps; combined with the high costs of AI military competition (over the past five months, large-scale AI cloud service providers issued bonds totaling $170 billion, compared to only $30 billion annually from 2020-2024, with credit spreads widening continuously), and the U.S. government’s plan to keep 30-year Treasury yields below 5%… U.S. small-cap value stocks are set to experience a major long-term turning point relative to large-cap growth stocks.

U.S. Assets → Emerging Market Assets:

The new world order is driving a global bull market, shifting the pattern of American exceptionalism toward global rebalancing. U.S. “overheated” economic policies are fueling a new “anything but dollar” trading trend… International stocks are expected to lead gains, especially in emerging markets—AI development boosting commodity demand, with emerging markets being major commodity producers; additionally, market allocations to Chinese and Indian assets remain severely inadequate.

The report notes that Chinese bank stocks have quietly hit an eight-year high… With China’s policy efforts and the end of trade wars, the next wave of the global “deflation ending” trade is likely to be led by Chinese assets (banks, real estate, consumption), marking a significant rotation of capital from Chinese bonds to Chinese stocks.