Many large investors are approaching 2025 with a sense of nervous anticipation. That may seem surprising: the world economy has so far avoided a hard landing, while U.S. equities are on track to gain 20% or more for the second year running. President-elect Donald Trump’s impending return to the White House and lingering inflation concerns give money managers reason to fret. The biggest risk, however, may be their dependence on the U.S. stock market.
Two years of world-beating returns have further swelled the clout of American equities. The United States now makes up 67% of the MSCI All-Country World Index, a broad benchmark which tracks 2,650 listed companies in developed and developing markets with a combined value of around $80 trillion. The next-largest country, Japan, accounts for less than 5%. Though global indices understate the heft of China’s stock markets, the dominance of U.S. companies is impossible to ignore. And it is growing: a decade ago, the U.S. was about 50% of the MSCI Index.
The trend is also self-reinforcing. As U.S. stocks beat those listed elsewhere, their weighting in global benchmarks naturally increases, effectively forcing investors who passively track an index to put more money into the country’s capital markets. Joining the S&P 500 Index (.SPX) is now a golden ticket: shares in Palantir Technologies (PLTR.O) gained 14% in a day in September after S&P confirmed that the $159 billion data analysis company would join its flagship benchmark. Little wonder that European companies like building materials giant Holcim (HOLN.S) are eager to join that club.
For many large investors, though, the gravitational pull from the United States also presents a dilemma. Professional money managers mostly like diversification. Spreading a portfolio between different regions and asset classes reduces the risk of sudden losses and should therefore produce more sustainable long-term returns. “We are actively not letting our exposure to the United States get too large,” the head of one large pension fund recently told Breakingviews, while admitting that doing so had recently been painful.
Of course, listed equities are only one component of a much larger investment universe that includes bonds, commodities, real estate and alternative assets. Yet few expect the U.S. stock market juggernaut to slow any time soon. Strategists at most large investment banks predict the S&P 500 will end 2025 at between 6,500 and 7,000, implying a gain of 7% to 15%. Bank of America analysts expect U.S. companies to report a 13% increase in earnings in 2025, up from 10% this year, helped by falling interest rates. UBS analysts point out that when the Federal Reserve cuts rates outside a recession, as is happening now, U.S. equities on average gain 18% in the following 12 months.
The historical case for U.S. stock market exceptionalism is also powerful. Over the past decade, the S&P 500 has produced a compound annual return of 13%. In the same period, Japanese, European and emerging-market stocks posted equivalent gains of just 6.1%, 5.3% and 3.4%, respectively, according to Nicolas Colas, co-founder of DataTrek Research. Nor is this a recent phenomenon. Studying data stretching back to 1900, the academics Elroy Dimson, Paul Marsh and Mike Staunton found that U.S. stocks produced an average real return of 6.6% in U.S. dollars, compared with 4.5% for international equities.
It would therefore take a brave investor to bet against this trend, especially as big U.S. technology companies have established an early lead in artificial intelligence. Nevertheless, there are several reasons for caution.
The first is concentration. The very largest U.S. companies are unusually dominant. The top 10 stocks in the S&P 500 make up about 35% of its value – the highest proportion since the 1970s, when investors flocked to a handful of large and high-quality companies known as the “Nifty Fifty”. This leaves investors exposed to the fortunes of several high-flying firms. The concentration is mirrored in the global benchmark too. Apple’s (AAPL.O) 4.5% weighting in the MSCI All-Country World Index is almost equal to that of all Japanese stocks combined, for example. Collectively the so-called Magnificent 7 – which includes the iPhone maker, Nvidia (NVDA.O), Microsoft (MSFT.O), Amazon.com (AMZN.O), Meta Platforms (META.O), Tesla (TSLA.O) and Alphabet (GOOGL.O) – account for $16 trillion of value, or more than a fifth of the global total.
By almost any gauge, U.S. stocks are also pricey. Using the measure of cyclically adjusted earnings developed by the economist Robert Shiller, for example, they trade on a higher multiple than at almost any time outside the dotcom craze of the late 1990s. They are also more expensive than their international counterparts. The S&P World ex-U.S. Index, which tracks international large- and mid-cap companies, trades on around 18 times historical earnings. The U.S. benchmark is valued at 28 times. And the divergence stretches beyond technology: large U.S. banks and industrial companies enjoy a premium to their counterparts in other countries.
These are good reasons to believe that further gains may be limited. The S&P 500 has only once gained more than 20% in three consecutive years, and that was in the late 1990s, points out Deutsche Bank strategist Henry Allen. Analysts at Goldman Sachs project the benchmark will produce an annualised gain of just 3% in nominal terms over the next decade, which is barely enough to keep up with inflation.
A period of humdrum returns would not necessarily mean the end of exceptional American stock market performance. U.S. laws and regulations continue to provide a favourable environment for equity investors, and Trump appears to consider stock market returns a measure of political success. He has tapped Kevin Hasset, co-author of the spectacularly ill-timed 1999 book “Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market,” to chair his National Economic Council.
Nevertheless, the scale and clout of U.S. stocks means that investors around the world are more exposed than ever before to the ups and downs of the world’s largest equity market. The biggest risk for investors in 2025 is hiding in plain sight.
Follow @peter_tl on X
