Foreign investors are still pouring money into U.S. assets, and the dollar remains the undisputed global reserve currency

U.S. financial markets keep proving the naysayers wrong.

Talk of America's waning financial and economic hegemony has been greatly exaggerated.

As the 250th anniversary of the original Independence Day approaches, U.S. markets are about as dominant on the global stage as they have ever been.

That might come as a surprise to some. One year ago, Wall Street was abuzz with talk about the "Sell America" trade. The big fear was that President Trump's aggressive tariff hikes and his public attacks on former Federal Reserve Chair Jerome Powell would encourage frustrated foreign investors to sell the U.S. dollar DXY, and U.S. securities, in favor of foreign assets, gold (GC00), bitcoin (BTCUSD) or commodities.

This scenario briefly materialized in the aftermath of Trump announcing his "liberation day" tariffs on April 2, 2025. But it would seem the allure of the artificial-intelligence race, and the deep liquidity of U.S. dollar-denominated markets, has proven too compelling to pass up.

"We were rightly skeptical about this so-called Sell America trade. As tariff concerns eased and recession fears abated, the debasement narrative lost momentum," Ed Yardeni, president of Yardeni Research, said in commentary shared with MarketWatch.

Yardeni and his team parsed the official data released monthly by the Treasury Department, and found that foreign investors poured more than $1.4 trillion into U.S. assets during the 12 months through April 2026.

"The experts were wrong while President Trump was right. Many such cases!" said White House spokesman Kush Desai in an email to MarketWatch.

As of June, the U.S. equity market remained far and away the most valuable in the world, accounting for nearly half of global stock-market capitalization, according to an analysis from Deutsche Bank.

Dollars and cents

Returns for investors in U.S. stocks have dwarfed those for equities trading in the rest of the world over the past 15 years. To be sure, that trend has started to shift over the past year, as stocks in South Korea, Europe, Japan and elsewhere have seen strong performance.

But the drivers behind why U.S. stocks performed so well for so long have remained firmly intact, according to Michael Cembalest, chair of market and investment strategy for J.P. Morgan Asset Management.

Simply put, American companies have a higher return on assets, and a higher return on equity, than companies in Europe, Japan or China, Cembalest said. In dollar terms, profits for publicly traded U.S. companies have grown much more rapidly than those of their foreign competitors, according to profit estimates from LSEG.

Another popular theme among U.S. doomsayers is the idea that the dollar's status as the global reserve currency is under threat. Dollar doubters say that stubborn U.S. budget deficits, a booming debt-to-GDP ratio and Washington's increasing willingness to levy financial sanctions on foreign governments, companies and individuals have helped to weaken the buck's hold on the global economy.

While these criticisms are valid, many of these issues - particularly heavy debt burdens - also apply to China, Japan and many European nations.

Cembalest tracks six metrics that he said can help investors get a read on the dollar's reserve status: The dollar's share of cross-border loans; the share of international debt securities denominated in the buck; foreign-exchange trading volumes; currency-reserve asset allocation; export invoicing; and payments made through the global Swift interbank system.

All six have been mostly stable in recent years, as the below chart shows. And although the dollar's share of global central-bank currency reserves has declined by 3% since December 2020, the offsetting increases have accrued within the "other currencies" category tracked by the International Monetary Fund. The reserve share for the dollar's biggest rivals - the Chinese yuan (USDCNY), the euro (EURUSD), the Japanese yen (USDJPY) and the British pound (GBPUSD) - have also declined.

"Reserve currencies are hard to dislodge, particularly without a clear replacement," Cembalest wrote in a June 23 report.

10 reasons why

The success of the U.S. economy, and U.S. markets, isn't an accident. A team of strategists at Deutsche Bank outlined 10 factors that, according to them, helped hasten the U.S.'s rise to a preeminent global power from a small country at the time of its founding.

For one - and "most critical historically," according to Deutsche Bank - the U.S. benefited from 200 years of institutional and political stability that helped shore up confidence in its capital markets, aiding economic growth.

Then there's its unique geography, which has often helped insulate it from security risks and external threats. The U.S. has plentiful arable land, navigable rivers, large coastlines and access to two oceans.

In turn, vast natural resources transformed the U.S. into an energy powerhouse and, today, an energy exporter - a huge global advantage that has helped insulate it from global geopolitical shocks, such as the recent closure of the Strait of Hormuz.

America's geographic advantages also meant that its industrial base was mostly unaffected by the destruction of World War I and World War II, while the economies of its main competitors in Europe were devastated by the turmoil.

The sheer scale of the U.S. domestic market - with more than 300 million people - helped American companies scale their businesses before venturing abroad. There are high domestic incomes, a common English language and low internal barriers to trade. Today, eight of the world's 10 largest firms are based in the U.S., according to the Deutsche Bank team; none are based in Europe.

The U.S. dollar's reserve status granted the U.S. an "exorbitant privilege" that has helped tamp down borrowing costs by boosting demand for Treasurys, while allowing the U.S. to run persistent fiscal and trade deficits without sparking a run on the currency.

A robust banking system and wide availability of nonbank financing helped funnel capital to startups and other ventures, allowing them to sustain losses for longer periods as their businesses matured.

Self-compounding advantages in education and research led to scientific discoveries that ultimately made their way to the private sector - the internet being one notable example - while ensuring a deep pool of top talent.

Pro-business legal architecture ensured a greater tolerance for business failures than in Europe; Chapter 11 bankruptcy reorganization is designed to preserve and restructure viable firms, rather than push them into liquidation.

The final reason, according to Deutsche Bank, was adaptability. The U.S. has a cultural acceptance of failure, and a capacity to reinvent itself and change with the times.

"While capitalism has been a key underlying driving force, it is pragmatism, rather than ideology, that have driven continued success over time," the Deutsche Bank analysts wrote in their June 24 report.

U.S. stocks finished lower on Friday, with the S&P 500 SPX and Nasdaq Composite COMP snapping two weeks of consecutive gains. Although it also declined on Friday, the Dow Jones Industrial Average DJIA still managed to cement a third-straight week of gains.

-Joseph Adinolfi

(END) Dow Jones Newswires