Are you ready to embrace the potential of global equities?

By Andrew VanWazer, Executive Director, Head of U.S. Wealth Management Portfolio Strategists and William M. Smith, Senior Associate, Portfolio Advisory Group

As we move further into 2025, the market dynamics have shifted significantly, underscoring the importance of diversification across geographies. While the charts and data presented in this article reflect the market conditions as of year-end 2024, recent developments have altered the landscape.

Year-to-date (YTD) 2025, we have observed a reversal in the performance trends that were prevalent at the end of 2024. As of December 31, 2024, the U.S. valuation premium was at 54%. By April 14, 2025, it had decreased to 42%. This indicates a reduction in the premium investors are willing to pay for U.S. stocks, suggesting a shift in market sentiment or valuation dynamics.

For investors who have profited from U.S. exceptionalism, it’s time to remember that markets are cyclical and diversify accordingly. Here, we explore what it means to “go global” in today’s market context, why you might want to do so (hint: you may be overexposed to the U.S. tech sector), and potential outperformance and diversification benefits for the next 10 to 15 years.

What does it mean to “go global” in the context of today’s markets?

For a start, it’s worth remembering that “going global” doesn’t mean making the majority (or even at least half) of your equity investments outside the U.S. Today, the MSCI World Index, a commonly referenced index for global developed-market equities, includes an enormous market-cap-weighted slice of U.S. stocks at roughly 74% of the index.

This is a big shift since 2010, when the U.S. versus non-U.S. split was closer to 50-50. Even making a modest strategic allocation of about 25% of your portfolio to non-U.S. equities could still potentially confer long-term diversification benefits.

Currently, the S&P 500 comprises a 45% weighting to tech stocks, including the “Magnificent Seven”: Alphabet (Google), Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. From 2008–2024, over 50% of U.S. equity market outperformance was due to the sustained performance of the U.S. tech sector (including the non-tech members of the Magnificent Seven). Given that the current sector and single-stock composition of the S&P 500 Index is so heavily dependent on just seven stocks, we think opting to diversify now is more important than ever.

That concentration of growth has also produced a lot of volatility. From 2020 to 2024, the Magnificent Seven posted average annualized volatility of 42%, doubling that of the broader S&P 500. Moreover, the S&P 500’s volatility is higher relative to global stocks as measured by the MSCI World Index, largely due to their influence. As these stocks’ recent swings in price show, reducing some of the U.S. “home bias” in your equity portfolio by making a long-term, strategic allocation to non-U.S. stocks could help mitigate future volatility. At the same time, you can position your portfolio to benefit from sector-related performance differences, too.

Why does diversification still matter?

Although U.S. outperformance has been a familiar feature of global equity markets since mid-2008, there is reason to doubt whether that trend can continue. Prior to 2008, cycles of alternating outperformance were the norm: Since 1970, U.S. stocks have delivered five clear periods of sustained outperformance, averaging 96 months, while world markets have delivered four periods of sustained outperformance, averaging 45 months.

The relative performance metrics look similar over shorter periods, too: The U.S. has outperformed world markets in more than 70% of three-year rolling periods since 1969, including all three-year periods since the start of 2010.

Could a reversal be at hand? The most recent period of U.S. outperformance has been supported by positive economic and financial drivers, but these may be vulnerable to shifting macroeconomic forces and geopolitical risks.

Identifying historic drivers of U.S. market exceptionalism

At the center of our analysis is a key question: How vulnerable is U.S. equity performance? Since mid-2008, the S&P 500 has beaten the MSCI EAFE Index by a sizable margin, delivering average annual returns of 11.9% versus 3.6% through December 2024. In the chart below, we analyze the return drivers underpinning those returns: earnings growth, valuation expansion, currency fluctuation (FX) and dividends.

Superior earnings growth in the United States can be partially explained by its faster nominal gross domestic product (GDP) growth, which has doubled since June 30, 2008. By comparison (in local currency terms), Europe’s nominal GDP has risen by 60% over the same period and Japan’s nominal GDP has grown by 14%.

But the United States has also done better historically in translating economic growth into corporate earnings. Using return on equity (ROE) as a measure of how efficient companies are with their equity capital, we can see that the S&P 500 has maintained a higher ROE than the MSCI EAFE Index since June 2008 – and that spread has widened over time. Currently, ROE for the U.S. market is 19% versus 12% for EAFE.

Several factors are driving that difference, including U.S. technological innovation, more efficient operations and shareholder-friendly government policies, such as corporate tax cuts. The combination of higher earnings growth and ROE have led investors to place a higher multiple on the U.S. equity market.

In this context, it’s easy to see how the booming tech sector has contributed to U.S. earnings growth and multiple expansion. The chart below shows the change in earnings and valuation for each of the 10 sectors in the United States and EAFE since 2008. Overall, the U.S. has experienced better earnings growth and multiple expansion across every industry sector; only communication services had lower relative P/E growth in the U.S. compared with EAFE.

What might catalyze a shift in market leadership?

U.S. market exceptionalism has been a powerful trend, but risks – especially in the tech sector – are rising. In late January, an unexpected announcement that China-backed artificial intelligence (AI) startup DeepSeek had developed a cheaper but no less effective AI pushed U.S. tech stocks’ valuations sharply lower. Chip-maker Nvidia was hit hard as investors questioned whether the massive capital expenditure planned by tech giants for AI data centers was justified. Since then, Nvidia’s good-but-not-great quarterly results have weighed down its share price.

Uncertainties about the direction of U.S. economic and foreign policy have also added to market uncertainty. U.S. consumer sentiment is weakening, and the Trump administration’s threat to impose steep tariffs has added to fears about a potential resurgence in inflation. On the flip side, a potential resolution to the war in Ukraine could actually benefit European stock valuations.

To be clear, however, we expect U.S. earnings growth to continue to rise. But if the U.S. is to outperform EAFE in the future, U.S. earnings will have to grow faster than those in EAFE, and the U.S. market will have to maintain its valuation premium. That may not be as easy to do: As soon as the news about DeepSeek broke, for example, the U.S. market’s relative valuation to EAFE dropped from 55% to 49%.

Our firm’s Long-Term Capital Market Assumptions forecast that EAFE stocks will outperform U.S. stocks by 1.4 percentage points (8.1% versus 6.7%) over a 10- to 15-year investment horizon. Many investors have been skeptical of that prediction, but it’s important to look at the process driving this estimate.

To focus on specific drivers of this difference, we will use the region’s largest constituents – Euro Area, Japan and U.K. stocks – to ground our analysis. We project that:

If non-U.S. stocks start to recapture investor interest, market moves in these securities could unlock a lot of potential buying, like the release of a coiled spring.

Mitigating risk while preparing for the next market cycle

We think now is the time for investors to take a long-term view and consider diversifying their equity holdings. As recent market moves have shown, the valuation premium that the U.S. market has long enjoyed may be under pressure from various influences. While we don’t expect to see a complete reversal of earnings growth trends, risks are building: Valuation compression, U.S. dollar weakness and lower dividend yields are likely to offset U.S. earnings growth, impacting future market performance.

Looking ahead, we expect non-U.S. equities to provide competitive returns and possibly outperform U.S. stocks. Diversifying now may enable you to establish a long-term, strategic allocation of 25%–30% that mitigates against concentration risk in the S&P 500 and delivers a source of potential outperformance.

We can help

For insights and guidance on navigating current equity market risks and opportunities, contact a J.P. Morgan advisor.

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