America at 250 – Innovation, Market Leadership and the Power of Compounding
The desk believes that the strength of U.S. market leadership will continue to drive the performance of the U.S. dollar amid ongoing structural advantages. Per the full note from BofA Global Research, the historical annual return of nearly 10% on U.S. equities can be attributed to a potent mix of innovation, robust corporate earnings, and a business-friendly environment. This underscores the enduring role of the U.S. dollar as a global reserve currency, despite potential volatility. With no immediate calendar catalysts, the focus remains on the underlying economic fundamentals that support this thesis.
What the desk is arguing
The desk posits that the long-term outperformance of U.S. equities will substantiate continued dollar strength as America closes in on its 250th Independence Day. As highlighted by Derek Harris and Jared Woodard in their discussion, the combination of innovation and corporate success plays a crucial role in maintaining this market leadership, reinforcing the demand for the U.S. dollar in the global arena.
Supporting evidence can be seen in the structural drivers discussed in the podcast, including advanced American R&D capabilities and high corporate profitability, all contributing to the resilience of the dollar. This forms a compelling narrative for institutional investors as they navigate uncertain global markets while expecting continued dollar dominance.
The alternative perspective would suggest that rising challenges to U.S. economic preeminence, such as increased market competition from other nations, might weaken the dollar's position. However, current indicators do not support this view, given the strength indicated by historical performance metrics.
Where it sits in our coverage
Our consensus target for USD/EUR currently sits at 1.075, with a range between 1.04 and 1.12. Specific firms like jpmorgan project a target of 1.10 for March 2026, while bofa offers a lower estimate of 1.04 for the same tenor.
This perspective of sustained dollar strength aligns with the broader market consensus, as most firms remain optimistic about the dollar's future performance in light of its historical resilience and ongoing structural advantages.
How other firms see it
A number of firms, including jpmorgan and goldman, express alignment with this bullish stance on the dollar, emphasizing its stability in the face of economic challenges. In contrast, bofa presents a more cautious outlook, identifying potential headwinds that could undermine U.S. dollar strength.
The trajectory of USD/JPY is particularly relevant here, as it often reflects shifts in U.S. monetary policy and market sentiment towards risk, providing traders with critical insights into dollar performance.
01U.S. market leadership is underpinned by innovation and strong corporate earnings.
02The U.S. dollar remains a critical component of global finance amidst structural advantages.
03Historical performance supports continued institutional confidence in the dollar.
04The current economic landscape shows no immediate catalysts to undermine dollar strength.
Market implications
Traders should monitor the USD/EUR level around 1.075, as it reflects the consensus target for future movements. Pay attention to economic indicators that lend support to the U.S. narrative of resilience, as they will likely influence market positioning as we approach critical measurement periods in 2026.
Risks to this view
A significant shift in U.S. economic policy or an unexpected financial crisis could significantly alter market dynamics and challenge the current strength of the dollar. Additionally, increased competition from emerging markets may pose risks to the U.S.'s dominant economic position.
Hello and welcome to Global Research Unlocked, where we discuss what's rising from growth industries to rising risks and opportunities in global markets. I'm Derek Harris, Head of Global Wealth Management Portfolio and Investment Strategy at BofA Research and we're recording this episode on Tuesday, June 16, 2026. I'm joined today by Jared Woodard, Head of the Research Investment Committee, to discuss his outlook and key market trends.
But we're going to do something slightly unique today. In the June REC, Jared looked at all things financial in the United States for the last 250 years, as we come up on the 250th anniversary. I think many of you will listen to this and be surprised by some of the key stats that Jared found, which I think people will find fascinating.
And Jared, we know you're busy, so thank you very much for joining us today. Thanks, Derek. It's a real pleasure to be with you.
Just before we get into the four more questions, did you get a lot of reactions to your report this month? Folks were very eager to learn about some of the data that we uncovered. I think a lot of the historical data is probably less familiar to investors, and many investors were surprised that some of the strengths that we're familiar with in U.S. markets from recent years is actually quite typical of some of the returns and the success that American companies have enjoyed over the last 100 or 150 years.
Right. So let's go back in time, because I think you're right. It's not just about what we're experiencing today.
It's the length of stock market duration and appreciation. Obviously, there are years where the market can go down a lot. We've experienced that in our lifetimes, and previous generations have also experienced it.
But when you smooth that out and you look at the compounded annual growth rate, what is the compounded annual growth rate of the U.S., and how does this compare to other markets? One of the big surprises is that on an annualized basis, average returns for the last 150 years of U.S. equity market data, all the data that we can find, stocks in the United States have averaged about 9.9% per year, almost 10% a year. And that's the kind of returns that maybe investors already have in mind, but again, maybe it's not what people would have assumed earlier in the history of this country.
More importantly, when we look at the data for other countries, many of which had stocks listed on their exchanges in Europe, for example, before the founding of this country even, we looked at all the different 150-year periods that we could find in countries like France or the Netherlands and so on. What was surprising is that we couldn't find any other period in any country that had returns that matched what the United States has enjoyed so far in its history. During the time when the United States has been a country anyway, other developed country stocks on average returned about 8.5% per year, so also positive, also strong, but not quite as successful as companies in the United States.
And in terms of this outperformance, which I guess if you take 1.5% and you put it over 150 years, that accumulates to a lot of money. What do you think is attributable, what are the main elements of why the overall market in the U.S. has shown to have a higher appreciation rate? Well, I think that the fundamentals explain a lot of the returns.
It's not just about prices going up, but these strong returns have been backed by strong growth in corporate profits. We looked at the history of U.S. corporate profits again over the data that we could find and found that on average, companies in the United States have grown their earnings faster than what has been the norm across the developed world. On average, I think 7 percentage points a year faster over the past couple of decades.
And of course, even over the past 12 months, U.S. profits have increased rapidly, 21% year-over-year growth according to one measure. Do you think this is attributable to innovation, productivity, perhaps differing labor market rules between different countries? What are the key attributes to drive that?
And then also the operating margin, because you mentioned the operating margin in the U.S. averages around 16.7% versus the rest of the world at 14.7%. So what are some of the drivers of this outperformance? Underneath those corporate fundamentals, I think there are some economic and even public policy fundamentals that make that kind of success possible.
I think it's no secret that the United States has a very business-friendly environment compared to perhaps some other countries around the world. What might surprise investors is that the United States also scores incredibly well when it comes to governance and public policy. I know that these days it's very sort of fashionable to talk about polarization and conflict and so on and so forth.
But one study that we found, one major study of governance across the countries of the world found that the United States has one of the highest quality of governance scores among large countries. And of course, we have the largest GDP per capita. So it's not just a matter of tight rules and firm governance, but also the economic success that that can breed.
At a more tangible level, the United States invests a lot in new technology. We invest a trillion dollars in R&D every year, research and development. And we also invest in our people.
This was a bit of a surprise to me. We looked at youth unemployment among wealthy countries. And what we found is that over the past many decades, the U.S. has always had a lower rate of youth unemployment.
In fact, several percentage points lower than the average among high-income countries. So I think that these strong economic fundamentals, good governance, a business-friendly environment and investment in new technology have created the conditions for strong corporate profits and therefore strong market returns. And I think it was in, not in last month, not in the June REC, I think it was in the May REC.
People might want to refer to that. And you dispelled this notion that youth unemployment is on the rise because of AI. What is the most recent indicator that you've been seeing and what's it telling you?
Yeah, the latest data we saw showed a pretty steep decline in youth unemployment this year. I know that was a big area of concern in the fourth quarter of last year. I think the rate today is around 7%, which sounds high given the national average around 4%.
But if you look at the history of this measure, I think it's actually low relative to history and more importantly, has been falling pretty quickly in 2026. Right. So many of the clients at GWIM don't just hold equities, they also hold bonds.
And we've spoken a lot about equities right now. When you look at the return on bonds in the U.S., what is it average and how does that compare to the rest of the world? Yeah, this was some pretty surprising data to me.
We got data on the bond market since 1815. That was another year you were born? What we found is that U.S. bonds, and this includes corporate but also government bonds altogether in one measure, the average return was about 4.7% per year.
And that's the highest among countries that also have long-term bond market data. But it's not just about good returns. You don't want, especially in bonds, you don't want too much volatility.
That's not why people are there. And so we looked at the volatility of those returns. And what we found is that in addition to ranking the highest on returns, the U.S. bond market also ranked the lowest in terms of volatility.
And when you talk about the bond market, are you just talking about U.S. treasuries or both corporates and government? That includes corporate and government bonds. We compared that to countries like the United Kingdom, Netherlands, France and Spain, a few others.
And so in tangible terms, the U.S. had the fewest number of losing years in its bond market, at least since the end of World War II, and the smallest drawdown, the biggest gap between the high and the low compared to all these other countries. So although we have complex views about the bonds these days, what we found is that historically fixed income in the United States has been a great place to be, not just in equities. So maybe because it's the 250th birthday of the U.S., you're being generous about bonds, as you said.
But a couple of years ago, you did write the end of 60-40, which definitely caused a stir and people's attention. Given this new data, do you change your view on that or are you still kind of negative on the bonds? Well, the historic data honestly just makes us a little bit more confident than we were before even that the conventional wisdom about asset allocation might be a little bit short-sighted, even just outright wrong.
I mean, the idea that you would be allocating to long-term treasury bonds for the purposes of hedging your stocks, for instance, really hasn't worked. I think the key point here, and I want to give some numbers on this, but the key point is that when you look at history, long-term treasury bonds, whatever their merits, they were not a good diversifier. They were often positively correlated to stocks in the 20th century, as often as not.
There was a period kind of from the year 2000, maybe when China entered the WTO and globalization really kicked off, there was a period of about 20 years where bonds and stocks were very deeply, negatively correlated. That means that when stocks go down, bonds go up in terms of price. But again, that's not been the norm in history and it really hasn't been the norm in recent years.
Since we started writing about this topic, stocks have gained more than 180% in the United States, I think annualizing around 17% per year since 2019. Over the same period of time, I think long-term treasury bonds, at least according to one index we follow, have lost 28% of value, minus 5% a year. The main thesis is that there are better ways to balance a portfolio, many of which we write about with our colleagues across the research department, and even in fixed income, better places to allocate away from long-term government bonds.
Right. But relative to the rest of the world, they still look pretty good. So one of the tenants, hallmarks, is that companies don't always have to be profitable or even have positive cash flow to do well because American investors seem to understand the need to invest in today for tomorrow.
I think we're kind of experiencing that in the market today. So why don't we talk about this R&D because it really is part of American capitalism. Could you talk about research and development and how much we spend, we, the United States, U.S. corporations, spend on R&D and how does this compare to the rest of the world?
I think the $1 trillion number I mentioned before as an estimate of U.S. spending on R&D each year is much, much larger than the rest of the world. Even if you just look at, say, defense spending measures as a big driver of a lot of new technology, the U.S. outshines even all of the OECD countries, aside from the U.S., don't spend, I think they only spend about $700 billion on defense, for example. But here's the key insight.
The thing that surprised me the most is the efficiency of that investment. It's one thing to spend a lot of money, and if you're a big country, you can afford to do that. That's not that impressive.
What I think is more impressive is the fact that the United States has led the world in turning that spending and all the other inputs, the labor and so on, that we invest into new technology and into innovation. And the outputs that we get are one of the best ratios, so to speak, in this global innovation index that we cite in the report. In other words, for all the resources that we commit, we have one of the highest outputs of new technology and patents and other markers of innovation relative to the inputs required among all the large countries.
I think part of this success is related to the pipeline that we have and have had historically from investments in national security that end up also producing things that are useful for the private sector. In the report, there's a nice graphic that we made some years ago showing a lot of the major components that are necessary for smartphones to operate or even the iPod before that. And we just showed the links to how those technologies were developed by different parts of the defense industrial base.
And in surprising ways, you don't think that that's going to be the application when you're trying to invest in security for your country, but that's been historically one of the most consistent pipelines. And of course, it's an area of great focus in a lot of our research across the department these days. Right.
So, Jared, you talk about product outcomes in terms of investing in the R&D and then eventually seeing these huge consumer products that you're talking about. What about the translation into profitability and cash flow? Did you look at any measures to see what that conversion time was or are U.S. investors pretty lenient about that?
I think historically, investors haven't expected that fundamental research is going to be commercialized on a particularly tight timeframe. Again, sometimes the technologies have very surprising applications. I don't think anyone, for instance, who maybe read about quantum mechanics and the way that was applied in GPS tracking, global positioning system, probably didn't have in mind that 20 years later they would be able to drive anywhere in their car with real-time directions.
But lo and behold, that's what we have. So investors typically don't think about R&D that way. And I think the governments don't even think about it that way.
The idea is to look for the cutting edge in technology and then trust that in a free market system where there's a business-friendly environment, entrepreneurs will find ways to commercialize technologies that prove to be useful. I think it's that combination of public sector funding to invest in things that are cutting edge and powerful and innovative, plus the private sector free market system that elevates the things that turn out to be particularly important. That combination of those two actors is what has driven a lot of the success in these major new technologies.
I think it's also what's behind part of the effort to re-industrialize in so many countries around the world these days. The recognition that assuming someone else is going to do the innovation or that someone else is going to do all the necessary production isn't always a safe assumption. And many, many countries, including the United States, are realizing that we want to make sure that we can do these really crucial things for the economy ourselves or with our allies as often as necessary.
Right. And that obviously was a big takeaway from that whole COVID period. So look, we've spoken about equities.
We've spoken about bonds. We've spoken about innovation. Let's quickly talk about the dollar.
Lots of people talk about the reserve currency or the threat to the reserve currency status. First of all, let's start with a little history here. I guess the reserve currency before the U.S. dollar was the British pound.
What percentage of foreign exchange reserves at the peak were British pounds? And what was the peak of U.S. dollar foreign reserves? And where are we today?
On the data we looked at, I think the pound peaked at around almost 70% of reserves. And then as the empire sort of withdrew, that figure changed. You would have to bring that up, Jared, you would have to bring that up on the 250th celebration.
But that's okay. We'll forgive you for that. Sorry, Derek.
The United States dollar, for all that has been written and said about its status in the world, remains, I think it's safe to say, the preeminent store of value globally, at least among currencies. Central banks around the world hold $7.5 trillion of foreign exchange reserves in U.S. dollars. The peak, best we can tell, was just a tick higher than that, $7.7 trillion in 2021.
And I think that on a percentage basis, it's 57% of global foreign exchange reserves. That's not the peak, but it's also well above the average over the last five or six decades. And how does this benefit us?
Well, yeah, if you don't focus on the little squiggles in the chart about how things are changing and think about this in economic terms, I think there's two big points that people are focused on today. Number one is the familiar point, the idea that these dollar reserves provide an exorbitant privilege, is the phrase, for the United States, because it allows the United States to borrow more cheaply. And I think that that's been true.
That's hard to argue with. I should note, too, though, that there's an increasing part of the conversation, not just about the benefits, but also about some of the potential costs if the dollar becomes too overvalued. And we've written in our year ahead, the last couple of years, that if you look at the dollar on a trade-weighted and inflation-adjusted basis, it's not far from the highest levels in history.
It's extremely, extremely high level. And that part of the conversation focuses on the fact that an overvalued dollar makes exports less competitive. It prevents reindustrialization.
And it even forces the U.S. to absorb global savings, excess global savings that might be created by the industrial policies run in other countries. So look, whatever the right level of the dollar may be, whether it's overvalued or not, we expect it to remain the central currency for reserves and even for trade settlement well into the future. Great.
Well, this final question, Ten, is a fun question. And I think about this as we celebrate the 250th anniversary. What I did this year is I took a 1978 VW Camper and I drove it basically from San Francisco to Minneapolis.
And what I learned is, because I've never done that before, one, it's a beautiful country and it's a big country. And that seems like a silly comment to make. But once you drive it, you realize how big and varied the U.S.
It was probably one of the best trips I've ever taken. For you, what are you going to do to celebrate the 250th birthday of the United States? Well, we did a we did a cross-country trip a couple of years ago, and I couldn't agree with you more of a beautiful country, beautiful people.
We went to the Grand Canyon earlier this year to look at a little more natural beauty. But I think for Independence Day, it's going to be something more pedestrian, probably. Well, we've got family coming in from all over the country and there'll be some grilling of burgers and so on and then probably fireworks, you know, in our town the way so many people do.
Great. Awesome. Well, thank you for those great stats.
And everyone, have a great Independence Day in July. Thanks, Jared. And thanks for the great report.
Thanks, Derek. Happy birthday to America. Bank of America and B of A Securities are the marketing names for the global banking businesses and global markets businesses, which includes B of A Global Research of Bank of America Corporation.
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