Perspectives - US democracy is history: what it means for markets

On a number of levels, the US still appears to be a democracy. Certainly, most adults vote every few years, but democracy is of course much more than that. Freedom of speech, the free market and an economic level playing field for citizens are important factors that are associated with the US version of democracy, and the so-called American dream.

However, there are a number of forces that have driven fundamental change in the nature of US politics and economics over the last few decades. One of these forces is growing inequality, driven very much by a playing field which clearly isn’t level. Inequality is normally used to refer to the inequality of wealth or income of individuals. However, inequality has also grown between companies.

This brings us to the free market, or lack of. For example, monopolies in key growth areas, such as tech, have been allowed to take root and in many cases have stifled competition, even if innovation is observable in this fast-growing sector. As has been the case historically, these large companies have curried favour with political parties. Some call it lobbying, some call it bribery but in colder terms it is an investment and, as with all investments, these companies expect some sort of return. This of course increasingly overshadows the return citizens expect for their vote.

It is not that this hasn’t happened before in the US, and beyond. “Lobbying” is a well-established industry. However, it is the scale and nature of this change. Looking at the scale first, much has been made of the so called Magnificent seven from a concentration risk perspective. In fact, the top five in the S&P 500 Index are all tech companies and, interestingly, the concentration is way ahead of where it was at the peak of the tech boom in 1999, as well as at any point in the last 30 years.

Turning to the nature of these monopiles brings us to free speech. Large organisations gaining monopoly control and then manipulating public opinion and policy is nothing especially new. What is new is that many of these companies, for example Meta, X (albeit unlisted) and Google, are uniquely suited to this role, as they specialise in information, which of course happens to be a key input to democracies. As a result, due to the sheer scale and unique nature of these companies, they have been able to capture the US political system like never before.

In fact, should we be asking ourselves whether the US is still a democracy? Certainly, on many levels the US increasingly represents a plutocracy, whereby a wealthy elite hold power. Some argue that this should be seen as a natural progression of free market systems, with greater efficiency creating larger and larger businesses until they understandably start to exploit their size. The strong have clearly grown stronger within the US corporate world and since Trump’s election this is clearly the plan for the US economy on a global scale.

So, what does all this mean for financial markets. It will take some time to understand it fully, as the rule book has changed so fundamentally. However, we can make helpful observations now. Expect increased volatility as markets adjust to the new world, compounded by US foreign policy which can turn on six pence. Expect too, not only that the strong get stronger but, as a function of that, the financially vulnerable become increasingly exposed. We’re thinking of both companies and economies here, as higher rates combine with a very proactive foreign policy designed to improve the US’s terms of trade. Expect central banks to come under pressure to prioritise lower rates, perhaps overshadowing their focus on independence.

Controversially, expect big US tech to be protected but not necessarily to be innovative, just at a time when Chinese start up DeepSeek unveiled its latest AI model, potentially demonstrating real innovation. That’s not to say we shouldn’t expect US innovation away from the Magnificent seven, we should, such an entrepreneurial culture runs deep in the US and those companies that keep their heads down and crack on will no doubt fare well.

A less democratic, increasingly rigged US will of course throw up new challenges but, as ever, there will be new opportunities. An open-minded investment approach will be best suited to navigating this black and white world.