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Over the last five days, the S&P 500 index gained 4.7%, reaching a new peak of 5,995 on Friday. This brought the SPX’s performance to 26.42% year-to-date. The outcome of the US presidential elections clearly made investors happy, as the threat of unrealized capital gains tax is off the table. Moreover, federal tax is likely to decrease from 21% to 15% under President Trump’s 2nd term. This is on top of the likely extension of the Tax Cuts and Jobs Act (TCJA) from 2017, which is set to expire by the end of 2025. This cut in federal revenue will have to be offset by cutting government spending, which could be replaced by tariffs. If tariffs become the central focus of Trump’s presidency, thereby consolidating domestic sectors, it is then no surprise that SPX gained a new high, after already outcompeting regional counterparts last year.
SPX as the Mirror of US Hegemonic Dominance
Following the Nord Stream gas pipeline sabotage in September 2022, the EU was dealt a severe economic blow as the source of cheap Russian natural gas was undercut. Since then, Germany has been undergoing deindustrialization, further exacerbated by the systemic removal of nuclear power and a shift to costlier and unreliable renewables.Likewise, the UK’s electricity prices soared to a new high this week, hitting £115.91 per megawatt-hour on Tuesday, which is a 9% year-over-year increase. As the EU’s energy prices increase, particularly in Germany and even France, the UK is becoming more reliant on continental Europe.For the first 9 months of 2024, energy imports accounted for a record 16% of the UK’s total supply, worth 26.3 TWh, per Nuclear Industry Association (NIA) report. Combined with an expected shift to tariffs, this bodes well for the US economy. The road is paved for a shift to the US as the manufacturing base, alongside China.Although Intel (Nasdaq: INTC) is yet to see money from the CHIPS and Science Act, the degradation of Europe’s economy is set to boost the industrialization in the US. Over the years, the EU has become increasingly reliant on US exports, with the major shift beginning in 2020. 
Image credit: eurostat
At 19.7%, the US was the EU’s largest partner for exports of goods in 2023.Considering that the S&P 500 index is composed of companies headquartered in the US, it is then no surprise that SPX keeps reaching new highs. Around 80% of total market capitalization of publicly traded US companies goes to SPX. Globally, composed of seven regions, the S&P Global 1200 makes for ~70% of the world’s market capitalization. Within the S&P Global 1200, SPX has a weight around 40% as the largest contributor. Even in early 2021 before the Nord Stream bombing, the SPX overshadowed its European counterpart Stoxx 600, per Flossbach von Storch Research Institute report. 
Image credit: Flossbach von Storch Institute ResearchYear-to-date, Stoxx 600 (SXXP) underperformed S&P 500 (SPX) at 5.82% vs 26.42% respectively. This is largely owed to the technology component of SPX, as there is a 20x gap in venture capital available for tech startups in the US vs Europe, which is further burdened by heavy regulation and taxation.
What about BRICS?
The economic dominance of the US is closely tied to the USD as the world reserve currency. It is how the Federal Reserve, together with the US Treasury, is able to monetize such an astronomically large debt, at $35.8 trillion as of October. In other words, if foreign governments and investors were to start selling US Treasury bonds, they could pull the rug under the US hegemony. Although it has been much speculated that BRICS nations (Brazil, Russia, India, China, and South Africa) have that potential with a BRICS currency, this is exceedingly unlikely. In that mashup, only China is a serious contender as the world’s manufacturing base, but recent moves suggest otherwise. Next week in Riyadh, on November 11, China’s Ministry of Finance (MoF) is set to sell $2 billion worth of dollar bonds to Saudi Arabia, as a BRICS invitee.Although that may appear as China’s offloading at first glance, it is likely that China will buy dollar bonds next year to refinance debt maturities, according to Zerlina Zeng of Creditsights Singapore LLC.This would coincide with the Fed’s easing cycle that is set to lower dollar funding costs. After all, even with lower yields, US bonds still offer better returns compared to the Eurozone or Japan. Presently, ECB’s 30-year yield curve is 2.6% vs the Fed’s 4.4%.
The Bottom Line
If there is any certainty in the financial markets over the last five years, it is that the S&P 500 (SPX) goes up. Over the last 5 years, SPX gained 93.70%, having outperformed its European counterpart Stoxx 600 (SXXP) by over three times.The SPX should be viewed as a concentrated effect of American geopolitical dominance. During the Biden admin, Europe has been subjugated even more to US interests. This should carry over into the next administration regardless of the political shift. But given that the Trump presidency offers greater release of capital through deregulation, and more reliance on tariffs, it is likely that SPX will set new highs during 2025 and beyond. More By This Author:Costco’s Stock Hits Record $948, Up 45% YTD: Factors Driving The Surge
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