Over the past two years, the global investment landscape has been sharply divided into two camps: those who enjoyed strong exposure to the S&P 500 – particularly the punchy concentration in mega-cap tech stocks – and those who did not. As US mega tech beat expectations in earnings release after earnings release, those with big positions made handsome returns, helped by the steady flow of money into passive strategies that heavily allocate to the biggest names in the index. Meanwhile much of the rest of the world has been left in the doldrums despite, in some areas, comparable earnings growth.
But 2025 is shaping up differently.
This year, as tariff fears drove markets lower in early April, those same stocks led the market lower. However you feel about Donald Trump, it is hard to argue that he hasn't made overseas investors think twice about heavy bets on US assets. The second quarter has bought a major recovery in US stocks, however, for the first time in many years, US stocks still find themselves behind non-US stocks year-to-date as we head into the summer. So, the question on everyone's minds is, has Trump killed US market leadership or is this just a cyclical setback in an ongoing trend?
Before we try and answer that, it is worth recapping how returns have played out over the last few years. If you look at global equities by broad geography the last two years really have been all about the US. The MSCI USA index is up 51% (in sterling total return terms), which is more than double the next best performer, MSCI Japan at 25%. Elsewhere, India followed closely with a strong performance, reflecting the country’s ongoing structural growth story and resilient domestic demand. The key laggard was China which barely moved at 2% over two years. Hence why any investors who were underweight the US have been feeling quite bruised over this period.
This year has seen a major reversal with the US bottom of the table, down -5%, while Europe has been the key winner. The MSCI Europe ex-UK index was the top performer of the set we looked at, up an impressive 14%. China snuck into third place at +7% as sentiment slowly improves towards the region. Hence the question on everyone’s mind, is this a chance to pick up US assets or the start of a structural rotation?
Looking forward equity returns will be a function of three things. Earnings growth, changes in valuations and moves in currencies. So where do we stand in these three by broad region? Big US tech earnings growth looks solid, the valuations aren't crazy but certainly have room to compress from here and the dollar is viewed as broadly highly valued. In fact, the US administration is officially aiming to weaken it. In Europe earnings have been weaker than the US in recent years although supportive measures like fiscal stimulus in Germany should help going forward. Meanwhile the euro would likely gain if the dollar weakens, but it is hard to argue that it is cheap. Meanwhile, in the emerging world we have interesting pockets that combine strong earnings growth, cheap valuations and weak currencies. That feels like an area that should benefit if the money rotates out of the US.
Nobody has a crystal ball to tell them whether big allocators like large pension schemes will shift big money away from the US this year and perpetuate the current trends. Only time will tell. However, the idea of a dramatic rotation out of the US and into international markets has been floated before - and burned investors more than once. Betting against US tech has been a painful exercise, with companies like Apple, Microsoft and Nvidia delivering consistent growth, all with the ability to weather political storms to a greater extent.
Still, we may be approaching a tipping point. With geopolitical tensions rising, protectionist policies in the spotlight and more compelling valuations abroad, global capital could begin to flow more evenly. Large institutional investors, including pension funds and sovereign wealth funds, may increasingly seek diversification outside the US.
Trying to time a regime change in market leadership is notoriously difficult. But the prudent path may lie in balance. Staying invested in dominant US names with strong fundamentals still makes sense – but so does ensuring meaningful exposure to undervalued opportunities beyond American borders.
