The Broadening of Global Equity Market Leadership and Its Implications for Diversified Portfolios

The Global Shift: Why U.S. Investors Can’t Ignore the World Anymore

Let’s cut to the chase: The U.S. stock market’s stranglehold on global equity leadership is fracturing. By August 2025, , a staggering outperformance driven by undervalued international equities and a weakening U.S. dollar [1]. This isn’t a fluke—it’s a structural reset. Investors who cling to the “America-first” playbook are missing the boat. The world is , and so must your portfolio.

The International Comeback: Europe, Japan, and Emerging Markets Lead the Charge
The magic is happening outside the U.S. Europe, for instance, , . Japan isn’t far behind, . , buoyed by semiconductor stimulus and a truce in U.S.-China trade tensions [4].

Why? Simple math. U.S. stocks trade at sky-high forward P/E ratios, . , which amplifies foreign earnings when converted to USD, and you’ve got a perfect storm for global diversification [5].

Small-Cap Gold: The Undervalued Gems of International Markets
While large-cap tech stocks dominate headlines, small-cap international equities are the hidden treasure. , . Why? They’re less exposed to multinational dynamics, benefit from lower interest rates, and thrive in pro-business policy environments. For example, European small-cap industrials are gaining from reshoring trends, while Asian small-cap financials are capitalizing on deregulation and tax cuts [7].

Monetary easing is the catalyst. The Fed’s anticipated rate cuts in H2 2025 are already spurring a rotation into small-caps, . . .

Non-Tech Sectors: The New Engines of Growth
The era of “tech or nothing” is over. In 2025, sectors like telecommunications, industrials, and utilities are stealing the show. European banking stocks, for instance, , . , .

This shift isn’t just about valuation—it’s about fundamentals. , . With U.S. tech stocks facing profit-taking and regulatory headwinds, this is the moment to rebalance.

Active Management: The Key to Capturing Alpha
Passive strategies are dead. Or at least, they’re not enough. With correlations between stocks and bonds breaking down [13], investors need active managers who can navigate the noise. Look for funds that overweight undervalued regions (e.g., Japan, Eastern Europe) and sectors (e.g., financials, industrials) while hedging currency risks [14]. ETFs focused on global small-caps or non-U.S. equities are also prime candidates—just avoid the “one-size-fits-all” global indexes that still overweight the U.S. [15].

Geopolitical Risks? Don’t Let Them Derail You
Yes, the Middle East is a mess, and U.S.-China tensions could flare. But here’s the kicker: Earnings growth and resilient investor sentiment are outpacing geopolitical jitters [16]. For example, despite U.S. tariffs on India, . The lesson? Diversification isn’t just about spreading risk—it’s about finding opportunities where others see chaos.

Final Call: Diversify or Die
The 2025 market is a mosaic of opportunities. International equities, small-caps, and non-tech sectors are no longer “alternative” plays—they’re the core of a forward-looking portfolio. With the U.S. dollar losing steam and global valuations screaming “buy,” it’s time to rethink your allocations. As the old adage goes, “Don’t put all your eggs in one basket.” In this case, don’t put any eggs in the S&P 500.

Source:
[1] The Case for International Equities [https://dodgeandcox.com/individual-investor/us/en/insights/the-case-for-international-equities.html]
[2] Diversification proves critical in 2025 [https://www.ssga.com/us/en/institutional/insights/mind-on-the-market-29-august-2025]
[3] International Stocks Eclipse Domestic Counterparts [https://markets.financialcontent.com/wral/article/marketminute-2025-9-4-international-stocks-eclipse-domestic-counterparts-a-new-era-for-global-diversification]
[4] Turning Tides: EM Equities Are Surging in 2025 [https://www.vaneck.com/us/en/blogs/emerging-markets-equity/turning-tides-em-equities-are-surging-in-2025/]
[5] U.S. Stock Market Underperforms as Global Equities Surge [https://growthshuttle.com/u-s-stock-market-underperforms-as-global-equities-surge-in-2025/]
[6] Outlook for small caps in 2025 [https://gabelli.com/research/small-cap-outlook-2025/]
[7] Can global small caps take big steps in 2025? [https://www.janushenderson.com/corporate/article/can-global-small-caps-take-big-steps-in-2025/]
[8] Small Wonders: Embracing U.S. Small Caps [https://www.brownadvisory.com/us/insights/small-wonders-embracing-us-small-caps]
[9] August 2025 Stock Market Outlook: Where We See Value [https://www.morningstar.com/stocks/august-2025-stock-market-outlook-where-we-see-investing-opportunities]
[10] The charts that show what you should have bought in 2025’s first half [https://www.trustnet.com/news/13452149/the-charts-that-show-what-you-should-have-bought-in-2025s-first-half]
[11] Review of markets over August 2025 [https://am.jpmorgan.com/ch/en/asset-management/per/insights/market-insights/market-updates/monthly-market-review/]
[12] 2025 Fall Investment Directions: Rethinking diversification [https://www.blackrock.com/us/financial-professionals/insights/investment-directions-fall-2025]
[13] Equity Market Outlook | BlackRock [https://www.blackrock.com/us/individual/insights/equity-market-outlook]
[14] Outlook 2025: The Case for Portfolio Diversification [https://www.morganstanley.com/ideas/2025-market-outlook-portfolio-diversification]
[15] 2025 investment management outlook [https://www.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/investment-management-industry-outlook.html]
[16] Why Stocks Can Be Resilient Despite Geopolitical Risk [https://www.morganstanley.com/insights/podcasts/thoughts-on-the-market/geopolitical-risk-stock-market-2025-mike-wilson]