The stock market's momentum in the United States is poised for a shift in 2025, warns Ruchir Sharma, chairman of Rockefeller International. Sharma foresees a potential underperformance of U.S. equities compared to global peers as concerns about mounting federal debt take center stage.
In an op-ed published in the Financial Times, Sharma highlights the risk of a reversal in the long-standing trend of U.S. market dominance. Over the next year, he predicts top-performing U.S. stocks may lag behind global counterparts by as much as 10%, a sharp contrast to 2024, when these stocks outpaced the global market by 20%.
"Momentum investing appears vulnerable to a significant crash, which could have severe consequences for investors," Sharma asserts.
During an interview with CNBC, Sharma elaborated on the unsustainability of the U.S. market's current trajectory. While U.S. valuations remain elevated, investor sentiment within the country is disproportionately bullish compared to other markets.
Despite accounting for only 30% of the global economy, U.S. stocks represent 70% of the global equity market's value. Yet, most investors continue to bet on the U.S.'s ability to outperform its international peers. Sharma finds this consensus troubling.
"Rarely have I witnessed such pervasive groupthink," he said. "At the start of this year, nearly everyone believed the U.S. stock market would maintain its lead, the dollar would continue strengthening, and the AI boom would further bolster big tech companies. I would be genuinely surprised if this collective conviction turns out to be correct."
Sharma argues that rising debt levels could erode investor confidence in U.S. equities. As of Monday, the federal debt has ballooned to $36.1 trillion. He suggests that America's privileged position—thanks to the dollar's status as the world's reserve currency—has allowed it to avoid the repercussions faced by other nations with similar debt burdens. However, that grace period may be coming to an end.
In his op-ed, Sharma cautions that a surge in long-dated U.S. Treasury issuance could dampen demand at future auctions. Investors may begin penalizing the U.S. for its deficits, potentially weakening its market performance.
Bond-market vigilantes—traders who sell off government bonds to pressure fiscal discipline—are already making waves in countries like Brazil and France. Sharma predicts the U.S. could face similar scrutiny. "No other country today is running deficits as high as the U.S., which has artificially inflated its growth," he told CNBC. "Debt is the primary factor that could burst the U.S. momentum bubble. It has the potential to disrupt markets significantly."
This is not the first time Sharma has sounded the alarm on U.S. markets. Last month, he described the U.S. stock market as being in the "mother of all bubbles" in another Financial Times op-ed. His warnings come as many Wall Street analysts anticipate another positive year for stocks in 2025, underscoring a stark divide in outlooks.
Wealth advisors and RIAs should pay close attention to Sharma’s insights, particularly given their implications for portfolio diversification and risk management. If U.S. equities falter, global markets may offer alternative opportunities. Staying ahead of these shifts will be crucial for advisors guiding clients through what could be a turbulent market environment.
