There’s a rumbling in the world of finance, a sense of unease that’s starting to unsettle the long-held belief in the U.S. stock market’s invincibility. Some prominent figures in the investment world are sounding the alarm, suggesting the U.S. market’s dominance may be nearing its end.

The federal debt currently stands at $36 trillion. This debt might spook investors and lead to U.S. equities underperforming global markets in 2025 — a prediction that stands in stark contrast to the rosy forecasts of many Wall Street analysts who anticipate another robust year for U.S. stocks.

The U.S. stock market has enjoyed a long reign at the top, with U.S. stocks outperforming the global market by a significant margin in 2024. However, there’s worry that this trend could reverse in the coming year, with U.S. equities potentially lagging behind global markets by as much as 10%.  

One factor contributing to this potential shift is the sheer size of the U.S. stock market. Despite the U.S. economy accounting for only 30% of global output, U.S. stocks make up a whopping 70% of the global equity market. This disproportionate size may have led to overconcentration of investor focus on the U.S. market, potentially blinding some to risks elsewhere.

These concerns about U.S. federal debt stem from the belief that the dollar’s status as the world’s reserve currency has allowed the U.S. to avoid the consequences of some fiscal policies for too long, and that this shield won’t last forever.

The increased issuance of long-dated U.S. Treasury bonds could lead to weaker demand at future auctions, forcing investors to demand higher yields to compensate for the risk of holding U.S. debt. This, in turn, could put downward pressure on U.S. equities. Recent actions by investors in countries like Brazil and France, who have demanded higher yields on government bonds, serve as a potential harbinger of things to come.

Diversification, always a cornerstone of prudent investing, becomes even more critical in this environment. Global markets, with their diverse opportunities and potentially lower risks, may offer a more attractive investment landscape than the U.S. market in the coming year.

The U.S. stock market’s long-held dominance may well be facing a significant challenge. Mounting federal debt, coupled with a potential shift in investor sentiment, could lead to U.S. equities underperforming global markets in 2025. Stay informed, stay flexible with changing market conditions, and embrace diversification — these fundamentals will be even more important to navigate this evolving landscape successfully.