'An incredible run,' but is the US losing its edge?

New findings from CI Global Asset Management has underscored several important themes, reinforcing several institutional investors' thoughts on US performance.

In their new strategy report “No Place Like Home”, CI GAM noted that the US is lagging in both equity and currency performance. Additionally, Canadian investors appear heavily weighted toward US assets, holding an estimated $6.3 trillion.

Lorne Gavsie acknowledged these findings open the door for a potential shift for institutional investors, noting that redirecting even a small portion of those holdings back to Canadian markets could yield meaningful upside.

Over the past 10 to 15 years, Gavsie noted, there’s been a substantial increase in foreign ownership of US assets, particularly equities. That share has climbed from the mid-single digits to nearly 20 per cent, a level he considers “a meaningful weight” among all equity holders. This buildup hasn’t just come from direct investment, he added, but also from appreciation of those assets.

The sustained growth and investor appetite is due to what he calls the two dimensions of “US exceptionalism”. On the economic side, the US has led the developed world in growth and productivity, with employment staying robust and fiscal policy adding further support.

At the same time, equity markets have outperformed, though he cautions that US valuations still sit “considerably higher than other developed markets,” even after some recent cooling.

“US fiscal support and productivity levels have been exceptional. When you look at it from a pure economic lens, it's just been an incredible run that they've had,” said Gavsie, senior vice-president and head of Macroeconomic & FX Strategy at CI Global Asset Management, pointing to financial markets.

“US equity valuations have been and remain considerably higher than other developed markets. What we're looking through in this report is to simply acknowledge, yes, US valuations have rolled over a little bit, but they remain considerably higher relative to other markets.”

As the paper suggests, Gavsie too, sees the US economy moving into a slower-growth phase after years of outperforming its peers. While he doesn’t predict an imminent recession, he’s clear that the expansion rate seen recently, around 3 per cent, is unlikely to last.

 “That pace of growth can’t be sustained at this stage,” he said, noting that long-term US trend growth sits closer to 1.8 per cent to 2 per cent.

Consequently, fiscal expansion is taking hold outside the US, he noted, with lower interest rates already introduced in countries like Canada and across Europe. Contrastingly, the US Federal Reserve has yet to implement significant easing. Gavsie believes this could make the difference that could further narrow the performance gap between markets.

From an investment perspective, Gavsie cautions that valuations should not be viewed as the exclusive factor for stock pickers.

“Valuations aren’t something that you should be using as a day-to-day indicator of which markets to own,” he said, still acknowledging that US equity valuations remain elevated relative to the rest of the developed world.

“There's potential for the rest of developed markets to start playing catch up a little bit," he added.

Gavsie believes the recent underperformance of US assets is ultimately the result of two converging forces: market fatigue and political disruption.

He pointed to the momentum that powered US markets heading into the year, which was driven primarily by the AI boom. The dominance of the Magnificent Seven was also undeniably strong. But as Gavsie highlighted, this surge eventually extended beyond just a handful of mega-cap names.

“I would argue that over the past six, maybe 12 months, it’s become broader than just the mag seven,” he said, adding “that momentum tends to ultimately run out of steam.”

“History shows us it's reasonable to expect some form of pullback or correction coming back down to more realistic levels on a relative basis. Other markets haven't had that same kind of momentum behind them. So that explains, in part, why we've seen US assets underperform over a very short period relative to other markets,” he added.

What’s exacerbated the situation, in his view, is the return of aggressive US political rhetoric. He characterizes Trump’s recent policy proposals as “somewhat surprising” and “very aggressive,” aimed more at creating leverage than certainty. This approach “has driven incredible uncertainty, not just for global markets and global economies, but for the US economy as well,” he explained.

On top of that, the traditionally stabilizing role of the US dollar is being tested. In prior crises, Gavsie explains, the dollar appreciated because of its status as a reserve currency and safe haven.

“This time around, it’s not a supply issue, it’s a confidence issue,” he said, emphasizing that erosion of confidence, compounded by heightened exposure to US assets in global portfolios, is forcing institutional investors to make hard choices. Either reduce US holdings outright or hedge currency risk more aggressively.

On the currency side, the move has been more pronounced, Gavsie admitted, noting that CI has reduced its US dollar exposure and now stands “neutral to slightly over hedged,” with the potential to increase hedging further.

He acknowledged that many in the industry are indeed taking notice, both on the potential for regional reallocation, but equally on the currency side.

“These are big decisions from a strategic asset allocation standpoint that require investment committees to come together, like how we operate. These decisions will be discussed over time. It's not a knee jerk reaction. It needs to be done in a portfolio construction context,” he said.

Domestically, Gavsie sees the next phase of Canadian investment opportunity as one built on diversification, not just a deeper stake in the same well-known sectors. He suggests that piling into the usual large-cap Canadian names likely isn’t the optimal path forward. Instead, he anticipates portfolios expanding their reach across a broader range of Canadian companies.

What will matter most, in his view, is clarity, particularly around trade policy and investment conditions. A rebound in fixed investment, an area where Canada has historically lagged, would also help build the case for deeper exposure to the domestic market.

“Should portfolios, by nature, be considerably exposed to the US, or should we start to trim that back? Those conversations are still occurring and provided US policy remains aggressive, I think we could potentially be in the early innings of a material rotation,” added Gavsie.