US stock-market outperformance is due to end, says Bank of America’s Michael Hartnett.
Chinese AI firm DeepSeek challenges US tech-stock valuations, he said.
Plus, a US fiscal slowdown and lower immigration rates pose risks to market performance.
The days of the US stock market’s outperformance on a global stage are about to end, Bank of America’s top global strategist Michael Hartnett says.
«US exceptionalism now exceptionally expensive, exceptionally well-owned, outperformance to peak in ’25,» Hartnett said in a client note on Friday.
Hartnett laid out a three-point argument for why US stocks’ outshining of the rest of the world may be over. One was the unexpected left hook that hit the US tech sector on Monday: DeepSeek.
The Chinese AI firm released its R1 chatbot to much fanfare, as it seemingly rivals ChatGPT’s performance with a significantly lower production price tag and more efficient energy usage. Investors were suddenly left questioning if all the money that tech firms were throwing at AI infrastructure was going to generate the kind of profits they were betting on. Hartnett thinks the answer is no.
«DeepSeek means peak in AI capex return expectations,» he wrote.
The other reasons Hartnett is skeptical that US stocks can continue to beat their global counterparts are the slowdown in government spending he expects and lower immigration levels.
US fiscal spending has been well above trend over the last five years, which has helped propel the market’s outperformance, Hartnett argued. But since taking office on January 20, President Trump has tried to issue a government spending halt.
The number of immigrants entering the US at the southern border has also sharply dropped in the last few months. Hartnett highlighted that of the US population’s 3.3 million gain in 2024, 2.7 million (84%) were immigrants. And according to a Cato Institute analysis of Census Bureau data, 78% of job gains from 2019 to March 2024 were by immigrants. Lower immigration rates could slow job growth and hamper the economic expansion.
These trends don’t necessarily mean the broader market is set to crash, Hartnett said. Rather, the so-called Magnificent Seven is probably set to underperform, and other parts of the market could benefit. The biggest risks facing the market are inflation and where 10-year Treasury rates go, he said.
Tariffs could prove trouble for inflation and rates and, in turn, stocks. On Friday, major US stock indexes dropped after the White House announced 25% tariffs on Mexico and Canada, and 10% tariffs on China. The S&P 500 fell more than 1% in the last few hours of trading, while 10-year yields climbed as much as eight basis points, from 4.5% to 4.58%.
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