Investment Strategy
Are you ready to embrace the potential of global equities?
In a surprising twist, the U.S. equity market has just offered investors a timely reminder about why diversification matters. Since January, U.S. stocks have underperformed EAFE (Europe, Australasia and the Far East) stocks, despite market consensus forecasting just the opposite as 2025 began.
This turnabout in relative performance may come as a surprise, since the U.S. market has outperformed EAFE since the global financial crisis (GFC). But market leadership is usually a cyclical phenomenon—not a permanent change. Over the long term, a reversal is probably inevitable. Several catalysts are already present, including increased volatility in U.S. technology stocks, a rising U.S. deficit and even the possibility of a ceasefire in Ukraine.
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 what you stand to gain: potential outperformance and diversification benefits over the coming 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 of your equity investments outside the U.S.—or even half. Today, the MSCI World Index, a commonly referenced index for global developed-market equities, now includes an enormous market-cap weighted slice of U.S. stocks, at roughly 74% of the index.1
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% to non-U.S. equities could still potentially confer long-term diversification benefits to your portfolio. And, given the current sector and single-stock composition of the S&P 500 Index, we think opting to diversify now is more important than ever.
Currently, the S&P 500 comprises a 45% weighting to tech stocks, including the “Magnificent 7”: Alphabet (Google), Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.2 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 Mag 7).
Along with strong earnings growth, however, the stocks that now make up the Mag 7 also delivered volatility. Over the past five years (through 2024), the cohort posted average annualized volatility of 42%, double that of the broader S&P 500. The resulting concentration risk has been pushing the S&P 500’s volatility higher relative to the MSCI World Index since 2019.
Reducing some of the U.S. exposure in your equity portfolio by making a long-term, strategic allocation to non-U.S. stocks could help mitigate future volatility. And by doing so, you could also position your portfolio to benefit from sector-related performance differences, too.
Why does diversification still matter?
History doesn’t lie. Although U.S. outperformance has been a familiar feature of global equity markets since mid-2008, change is possible.
Prior to the onset of the GFC, 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.3
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 2010.4
Market leadership cycles over time, but the S&P 500 has enjoyed an extended period of relative outperformance since the GFC
U.S. excess returns over rolling three-year periods (1969–2024)
Source: Bloomberg Finance L.P. Data as of December 31, 2024.
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 deconstruct the return drivers underpinning those returns: earnings growth, valuation expansion, currency fluctuation (FX) and dividends.
Four distinct drivers have powered S&P 500 outperformance since the GFC
Attribution of returns, U.S. equities vs. EAFE (Jun 30, 2008–Dec 31, 2024)
Source: Bloomberg Finance L.P., FactSet. Data as of December 31, 2024.
Past performance is no guarantee of future results.
Focusing on the S&P 500’s outperformance during that period (June 30, 2008–December 31, 2024), we note three specific tailwinds:
- Earnings growth: The S&P 500 grew earnings 4x faster than MSCI EAFE, delivering annualized earnings growth of 6.3% versus 1.6%.
- Valuation expansion: The S&P 500 realized P/E multiple expansion of 12.8x to 21.7x, compared to EAFE’s expansion of 11.3x to 14.0x over the same period.
- Currency differentials: Since June 2008, the U.S. dollar has advanced against major currencies with the U.S. Dollar Index advancing +50% cumulatively.
Superior earnings growth in the United States can be partially explained by its faster nominal 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.5
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. At the start of 2025, the U.S. stock market premium versus EAFE on a forward P/E basis was hovering at 55%, near its all-time high, although recent market volatility has narrowed the gap.
In this context, however, 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 has exhibited lower relative P/E growth.
Nearly all U.S. industry sectors have outpaced EAFE in earnings growth and valuation expansion since the GFC
Sector NTM EPS and P/E change since Jun 30, 2008 (U.S. versus EAFE)
Source: Bloomberg Finance L.P. Data as of December 31, 2024.
U.S. tech and tech-related sectors have also grown in size. Today, GICS Level 1 tech sector stocks6 account for 32% of the S&P 500.7 If we were to include the Mag 7’s four non-tech outliers, as well, that weighting would increase to 45%.8 By comparison, the MSCI EAFE Index has just 9% in tech and 22% in financials.9
* As of December 31, 2024
The U.S. tech sector’s phenomenal earnings growth has lifted the industry to a 32% weighting in the S&P 500
Sector weight change and performance since June 30, 2008 (U.S. versus EAFE)
Source: Bloomberg Finance L.P. Data as of December 31, 2024.
*Real estate was officially established as a GICS sector in 2016; prior to that, it was included in Financials.
*Real estate was officially established as a GICS sector in 2016; prior to that, it was included in Financials.
Past performance is no guarantee of future results. It is not possible to invest directly in an index.
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 AI startup DeepSeek had developed and launched a competitive large language model pushed U.S. tech stocks’ valuations sharply lower; chip-maker Nvidia was hit hard. 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 grown. 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%—since then, it has declined further, to 39% (as of March 11).
J.P. Morgan Asset Management’s Long-Term Capital Market Assumptions (LTCMAs) forecast that EAFE stocks may outperform U.S. stocks by 1.4% (8.1% versus 6.7%) over a 10- to 15-year investment horizon. Many investors have been skeptical of that prediction, but recent market events have underscored how vulnerable U.S. equities may be to higher tech-stock volatility, the threat of trade tariffs and declining U.S. consumer confidence.
Long-term return assumptions forecast that EAFE stocks may outperform U.S. stocks over a 10- to 15-year investment horizon
Return composition of the 2025 LTCMAs (U.S. versus UK, Euro Area and Japan)
Source: J.P. Morgan Asset Management, “2025 Long-Term Capital Market Assumptions.” Data as of September 30, 2024.
Conclusion: Mitigating risk while preparing for the next market cycle
We think now is the time for investors to take a long-term view and enhance the resilience of their portfolios by diversifying their equity holdings. As recent market moves have shown, the valuation premium that the U.S. market has long enjoyed may decline under pressure. 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.
Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The U.S. Dollar Index (DXY) is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The index consists of 23 developed market country indexes and 24 emerging market country indice.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the United States and Canada. "EAFE" stands for Europe, Australasia, and the Far East, which are the regions covered by the index.
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For insights and guidance on navigating current equity market risks and opportunities, contact your J.P. Morgan team.
All third-party companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.
1As of December 31, 2024.
2See footnote 1.
3Based on analysis of Bloomberg Finance L.P. historical data; December 31, 1969–December 31, 2024.
4See footnote 3.
5Based on analysis of Bloomberg Finance L.P. historical data; June 30, 2008–December 31, 2024.
6This is the broadest industry grouping, which includes technology services and companies.
7As of December 31, 2024.
8See footnote 7.
9See footnote 7.
KEY RISKS
JPMAM Long-Term Capital Market Assumptions
Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only – they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations.
“Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only – they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.
As risks to U.S. market exceptionalism rise, now is the time to explore often-overlooked opportunities in global equities.
Andrew VanWazer
Vice President, Regional Portfolio Specialist, Head of U.S. Wealth Management
William M. Smith
Senior Associate, Portfolio Advisory Group
Published Mar 18, 2025
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