Much ink has been spilled on the topic of U.S. exceptionalism. Is it alive and well, or at risk of being dethroned? Our crystal ball works just as well as the next investor’s but there is no debate that seismic shifts in geopolitics, technology and economic policy are redefining the global order.
At FS Investments, our job as investors is to navigate today’s challenges while anticipating tomorrow’s in order to deliver differentiated outcomes for our clients over the long term. As we see it, investors face two urgent questions today.
The U.S. has been the preferred destination for capital for years, and our economy remains the envy of the world: Could a new era of deglobalization and fragmentation change that paradigm? And if the U.S. remains economically exceptional, how can investors express this in markets?
Our research helps provide some answers:
- The U.S. is an aggregator of global talent and capital with a culture of innovation that drives scientific, technological and economic advancements. We enjoy one of the most sustainable economies in the world with food and energy independence, strong relative population growth, dynamic labor markets, a dominant global currency and deep capital markets. The U.S. is also best poised for resilience among major countries in the face of economic and geopolitical upheaval.
- The U.S. public equity market is historically expensive. A few large cap technology stocks—aka the Mag 7—have driven 40% of the S&P 500’s performance over last decade. Meanwhile, the ability for investors to access differentiated economic exposures in public markets has deteriorated. The number of public companies has been nearly halved in the past three decades, and within the Russell 2000 (ostensibly meant to track innovative small and midsize U.S. firms) over 40% of members have zero or negative earnings.
So how can investors exploit an economy as productive and self-reliant as the U.S. but reach beyond the scope of what public markets offer?
We believe the private U.S. middle market, comprised of over 200,000 companies that make up one-third of private gross domestic product (GDP) and employ nearly 50 million Americans is the best way of exploiting a new era of U.S. exceptionalism. These companies represent the “sweet spot” of domestic dynamism—growing revenues and earnings faster than the S&P 500 while offering 35% lower valuations.
Capitalizing within this new era requires not just investing in the U.S. (effectively all that was needed in the prior era) but partnering with sponsors and asset managers with the experience and relationships to unlock opportunities in this fragmented market. With over 30 years of middle market investment experience, we believe we offer compelling investment strategies to exploit these new opportunities for our investors.
As we navigate this new, uncertain environment, a Peter Drucker quote comes to mind: “The greatest danger in times of turbulence is not the turbulence—it is to act with yesterday’s logic.”
We hope you find this research insightful, and we welcome the opportunity to discuss it further.
Regards,
Mike Kelly
President and CIO, FS Investments
Core market thesis
Can U.S. exceptionalism survive the geopolitical and technological transformations of our time? In this report, we analyze the underpinnings of American economic exceptionalism, weigh its resilience and provide a playbook for investing in a new era.
Key findings
The private U.S. middle market offers investors the greatest way to exploit a new era of U.S. exceptionalism— and find growth at a reasonable price.
- The structural conditions that drove U.S. economic exceptionalism for decades remain firmly in place— from self-sufficiency to an innovative culture.
- As global instability rises, U.S. strength is likely to be compounded. However, the essence of U.S. exceptionalism is changing.
- U.S. dominance is priced into public markets. Investors are exposed to historically high valuations and a highly concentrated market, unreflective of the real economy.
- Investors are increasingly herding into the largest strategies, but today’s changes offer a compelling catalyst to refocus on the core middle market.
1. Public markets have already priced in U.S. exceptionalism
Global equity forward P/E ratios
Source: MSCI, Bloomberg Finance, L.P., as of February 28, 2025.
The valuation premium for U.S. stocks is near an all-time high, leaving no doubt about the market’s view of U.S. exceptionalism.
The U.S. remains the most productive and structurally resilient economy in the world—a distinction we believe will withstand today’s pervasive global uncertainties. Yet with the S&P 500 priced at 21x earnings, U.S. stocks aren’t just pricey; they’re historically stretched compared to both global peers and their own past. While the Magnificent 7 capture headlines, nearly every U.S. sector carries a premium that signals a broad belief in U.S. dominance. This creates the urgent market conundrum of today: Investors must find a way to capture upside from U.S. exceptionalism when the public markets already treat it as a foregone conclusion.
2. Private markets are funding U.S. dynamism
Growth in number of U.S. companies
Source: World Bank, U.S. Census Bureau, as of YE 2022.
Public markets have become an arena for the big to get bigger, while private markets fund the engine of the U.S. economy.
U.S. public stocks aren’t just expensive—they’ve become a distorted reflection of the economy they claim to represent. Companies are staying private longer, creating a reflexive cycle in which a shrinking public market is increasingly dominated by a handful of giants, while a long tail of lower-quality firms lingers at the margins. This setup has worked for investors over the past 15 years, but with public markets increasingly disconnected from the broader economy, the task for investors is clear: Utilize private markets to access the full breadth of U.S. economic exceptionalism going forward.
3. The core middle market balances fragmentation, growth and resilience
Distribution of U.S. firms by size
Number of firms within revenue range
Percent of revenue sourced from the U.S.
Trailing four quarters
Source: World Bank, U.S. Census Bureau, as of YE 2022.
The core U.S. middle market is the optimal investment expression of the ongoing shift in the meaning of U.S. exceptionalism.
As the global order fragments and uncertainty grows, the meaning of U.S. exceptionalism is set to shift—from outward projection to inward strength. Rising trade protectionism carries the risk of upending complicated global supply chains, hitting the beneficiaries of globalization. The core middle market is a diffuse opportunity set of nearly 20,000 firms—mostly private—who get 84% of revenues from the U.S. As the free trade consensus dissipates, the core middle market offers investors a unique combination of growth and domestic-focused resilience.
4. The middle market is the “sweet spot” in private markets— and an opportunity to access GARP
Distribution of 2024 U.S. PE fundraising
By fund size
Return dispersion by fund size
Source: Pitchbook, Preqin, as of December 31, 2024. Return dispersion uses IRRs for U.S. PE buyout fund vintages 2012-2021.
As investors herd into the largest strategies, we see compelling alpha potential investing in the true middle market.
Investors should carefully analyze strategies to ensure they are targeting the most attractive segments of private markets. Last year, 4% of private equity funds raised almost half of all PE capital, which will flow toward a relatively small number of firms in the upper middle market and large-cap segments. Funds targeting the core middle market represent the sweet spot of private equity, marrying scale with fragmentation. Performance bears out the benefits—middle market funds have higher median returns, higher potential for outperformance and lower downside risk than megafunds.
