Case for International Stocks

Executive Summary

Global equity portfolios are more concentrated in US stocks than at almost any point in history. The US now accounts for roughly 65 percent of the MSCI All Country World Index, a weight that has roughly doubled since the early 1990s and is more than four times its share of global GDP. This is not simply a reflection of American economic strength. It is also a structural artefact of passive investing, where rising prices inflate index weights, which attract further inflows, which push prices higher still. The result is a self-reinforcing cycle that has made the US overweight invisible to most investors, rather than a deliberate these positions represent the accumulated default of a decade and a half of benchmark discipline.

The case for reducing this concentration rests on several independent lines of evidence that converge on the same conclusion. US equity valuations sit at a substantial premium to the rest of the world, and to their own history, at levels that imply an earnings growth differential with no reliable historical precedent. A well-established empirical regularity shows that starting valuations have some predictive power over long-run returns. Investors buying at today’s US multiples are therefore accepting lower forward returns, whether they realise it or not. At the same time, the geopolitical calculus has inverted. US equities were once the safe core of a global portfolio but policy volatility, trade fragmentation, and institutional strain have become domestic American phenomena. Meanwhile the dollar’s structural advantage, the “exorbitant privilege” that compresses US borrowing costs and inflates asset valuations, is quietly eroding, as reserve managers from Beijing to Tokyo reduce their holdings of dollar assets in favour of gold and real assets. Formal welfare analysis using a calibrated international general equilibrium model reinforces the same point, that rising trade costs reduce the insurance value of US equity holdings, and the scale of tariff increases since early 2025 is sufficient, on its own, to justify a material reduction in US portfolio weight.

The prescription is not dramatic rotation. Abandoning US equities for the rest of the world confuses a rebalancing thesis with a directional macro call. Instead, the appropriate response is more measured. A gradual reduction in US overweight, directed toward markets where the valuation case is clearest, including the UK and selective parts of continental Europe and emerging markets. History suggests this kind of adjustment is made in one of two ways: deliberately and early at a modest cost, or reactively and late after the repricing has already occurred. The cost of being early is modest tracking error. The cost of being late is losing the adjustment, even if its precise timing is unknowable in advance.