Case for global equities: Enhancing opportunity, diversification, and risk management

The case for global equity allocation is gaining renewed momentum. By investing globally, investors gain access to a broader opportunity set across sectors, countries, and regions—reducing concentration risk and unlocking new avenues for growth and diversification. Broader exposure and lower concentration risk helps provide a form of “portfolio insurance” against shifts in investment styles or market momentum. This buffer is particularly valuable when markets are narrowly focused on a limited group of themes or companies, as is the case today.

"Year‑to‑date, several non‑U.S. markets have outpaced the U.S., underscoring the benefit of accessing a broader opportunity set."

Rotating leadership favors broader exposure

Year‑to‑date, several non‑U.S. markets have outpaced the U.S. (Figure 1), underscoring the benefit of accessing a broader opportunity set. Looking back, the 2008 global financial crisis (GFC) through to the onset of COVID‑19, markets were shaped by a backdrop of low interest rates, subdued inflation, and modest growth—conditions that supported asset performance. Combined with elevated U.S. federal government spending, these dynamics fueled strong returns and led to increasing market concentration in the U.S.

In the post‑COVID environment, the market landscape has shifted meaningfully. Interest rates and inflation are structurally higher, while government spending is becoming more globally distributed, supporting growth across regions. For example, Germany’s recent commitment of nearly EUR 1 trillion of additional borrowing for infrastructure and defense investment is already creating ripple effects across Europe. Against this backdrop, we see a broadening opportunity set for investors beyond the U.S., with compelling prospects increasing in international and emerging markets.

"Maintaining global breadth can help mitigate concentration risk, strengthen diversification, and expand potential return and alpha sources as leadership rotates."

Maintaining global breadth can help mitigate concentration risk, strengthen diversification, and expand potential return and alpha sources as leadership rotates. Importantly, because market regime transitions often unfold quickly and asymmetrically, portfolios that rely predominantly on U.S. equities for risk exposure may be more vulnerable to drawdowns and factor or sector shocks. It also may mean that they forgo exposure to differentiated sources of growth elsewhere.

Deglobalization driving less correlation between markets

After years of steadily increasing correlations among global equity markets, we are now seeing greater divergence and wider dispersion in returns across regions. Analysis since 2015 reveals that in the past three years (calendar years 2022, 2023, and 2024), the average correlation between nearly every major stock index has declined compared with the period from 2015 to 2020 (Figure 2). Following a sustained rise in correlations after the GFC, factors such as deglobalization, geopolitical tensions, and the fragmentation of global supply chains have shifted market dynamics. This regional divergence and reduced synchronicity among equity markets represent a significant change for portfolio construction and global equity investing.

Evaluating opportunities and risks: U.S., international, and global equities

U.S.

• + Deep markets, high‑quality companies, strong governance, innovation.
• – Stock market dominated by large tech firms, which can amplify sector‑specific risk.
• – High valuations, sector concentration, less exposure to global growth.
• – Trade at a premium to international and global markets.

International

• + Access to undervalued markets, diversification, high‑quality companies.
• – May underperform without U.S. exposure; can be heavily weighted to slow‑growth regions.
• – International equities can be heavily weighted to financials or cyclicals.

Global

• + Global equity approach balances sector and style exposures, mitigating drawdowns from regional or sector‑specific downturns, but can limit gains when particular themes are being established.
• + Combine the strengths of both, adaptable to shifting market leadership, balanced sector and country exposures.
• + Global portfolios can tilt toward undervalued regions when appropriate, potentially enhancing long‑term returns.
• – May underperform individual countries and regions at different times.

Active management in a concentrated U.S. market

Index concentration at the top of the U.S. market has created a more challenging environment for active managers. The rise of the so‑called Magnificent Seven has concentrated a disproportionate share of benchmark‑relative risk in a small group of mega‑cap stocks, limiting flexibility in portfolio construction. To succeed, active managers need to develop deeper insights into how artificial intelligence (AI)—the most disruptive technological force shaping markets today—is playing out. While the AI cycle is led by U.S. firms, expanding research coverage globally provides essential context to investment decisions. For example, Taiwanese electronics and networking equipment companies play essential roles in AI infrastructure. Meanwhile, China‑based innovators in generative AI and large language models and technology and social platforms, as well as leading technology firms in Japan, highlight how international activity intersects with AI leadership in the U.S.

Recent negotiations between a South Korean firm and a U.S. semiconductor company over high‑bandwidth memory supply demonstrate how global partnerships reinforce U.S. leadership in AI infrastructure. Examining these relationships helps investors uncover industry trends and view change from multiple perspectives. Such developments can both strengthen U.S. market concentration and expand opportunities for investors globally.

"Markets outside the U.S. provide differentiated growth drivers."

Recognizing these global linkages is crucial for investors. They explain not only the durability of U.S. market leadership but also where new opportunities may emerge. Broadening the investable universe—particularly into non‑U.S. and emerging markets—can restore diversification benefits that have become more limited, enhance active share, and position portfolios to potentially capture excess returns beyond concentrated U.S. benchmarks.

Global opportunities beyond the U.S.

Markets outside the U.S. provide differentiated growth drivers. Japan offers high‑quality manufacturing, advanced automation, and rising shareholder returns. Europe adds exposure to leading industrials, improving financials, luxury brands, and world‑class pharmaceutical firms. Emerging markets, such as India and Brazil, deliver fast‑growing economies supported by favorable demographics and rising consumer demand.

Broadening allocations internationally enables investors to capture themes underrepresented in U.S. markets—including deglobalization, infrastructure and defense spending, and consumer expansion—while also improving sector diversification. Non‑U.S. markets have lower technology weightings and greater exposure to value‑oriented and defensive sectors, adding more balance to portfolios (Figure 3).

Adopting a global equity approach also significantly expands the investment universe from 503 stocks in the S&P 500 Index to more than 2,509 stocks in the MSCI All Country World Index—over three times the size of the MSCI EAFE Index alone.

5X
There are five times the number of companies in the MSCI All Country World Index versus the S&P 500 Index.

For long‑term investors, combining U.S. growth leadership with international and emerging market opportunities offers the potential to reduce concentration risk, enhance diversification, and build more resilient portfolios that can adapt to shifting market leadership.