The Expat Equity Boom: Why Investors Are Fleeing U.S. Markets—and Where They're Headed Next

Investor sentiment has undergone a seismic shift. For the first time in decades, global fund managers are overwhelmingly betting against U.S. stocks while pouring capital into international markets. The June 2025 Bank of America Global Fund Manager Survey confirms a historic reallocation: a record 36% of investors are underweight U.S. equities, while 54% believe non-U.S. stocks will outperform over five years. This isn't just a tactical adjustment—it's a strategic rebalance rooted in macroeconomic optimism abroad and growing skepticism about America's fiscal and monetary path. Here's why this matters and how investors should respond.

The Sentiment Shift: From U.S. Dominance to Global Diversification

The data paints a clear picture. U.S. equities are now the least favored developed-market asset class, with allocations at their lowest since May 2023. Meanwhile, European equities are sitting pretty with a 34% overweight—their highest relative preference versus U.S. stocks since 2017—while emerging markets hit a net 28% overweight, their strongest position since August 2023.

This pivot isn't random. Investors are pricing in two critical trends: soft landing optimism and trade tension moderation. A stunning 66% of managers now expect a “soft landing” scenario—up from just 37% in April—driving confidence in global growth. Simultaneously, fears of a trade war have waned, with only 47% of respondents citing it as a top risk (down from 62% in May). This reduction in geopolitical anxiety has freed capital to flow into regions perceived as undervalued and poised for recovery.

The Macroeconomic Catalysts: Valuations, Fiscal Policy, and the Dollar

1. Valuation Arithmetic: Non-U.S. equities are cheaper. The MSCI All Country World Index (ACWI) excluding the U.S. trades at a 15% discount to the S&P 500, a gap not seen since 2020. Europe's cyclicals and Asia's tech sectors offer growth at a discount, while U.S. valuations remain stretched in tech-heavy sectors.

1. Fiscal Policy Skepticism: 81% of managers doubt U.S. fiscal measures will narrow deficits, and 59% see minimal GDP growth benefits. In contrast, the EU's NextGenerationEU recovery funds and China's infrastructure push are seen as more growth-supportive.

2. The Dollar's Fall from Grace: The U.S. dollar is at its most underweighted in 20 years (31% underweight), with investors betting on Fed rate cuts and rising U.S. twin deficits. A weaker greenback supercharges returns for non-U.S. holdings denominated in stronger currencies.

The Risks: Tailwinds Turned into Tail Risks

While the sentiment shift is compelling, investors mustn't ignore the risks. Three tail events could disrupt this rebalance:

1. Trade Tensions Reheated: Despite moderation, 47% still see trade wars as a top risk. A sudden U.S. tariff hike or China-U.S. tech decoupling could reverse capital flows.
2. Rate Hikes Gone Rogue: Though the Fed is expected to cut rates, a surprise hawkish pivot (if inflation rebounds) could weaken equities globally.
3. Emerging Market Vulnerabilities: While EM stocks are in favor, currency volatility and debt sustainability in countries like Argentina or Turkey remain flashpoints.

A Strategic Playbook: Overweight Internationally, Hedge the Risks

The data argues for a two-step strategy:

1. Aggressively Overweight Non-U.S. Equities:
2. Europe First: The Eurozone's 34% overweight preference isn't accidental. Strong valuations, a weaker euro, and cyclical recovery in sectors like autos and industrials make MSCI Europe (FEZ) or iShares MSCI EMU ETF (EZU) core holdings.

3. EM for Growth: Emerging markets (EEM) offer a mix of undervalued tech, materials, and consumer plays. Focus on countries with strong export ties to Europe (e.g., Poland, Taiwan).

4. Hedge Against Tail Risks:

5. Currency Protection: Use inverse USD ETFs (UDN) or short dollar futures to offset greenback volatility.
6. Safe Haven Ballast: Keep 5–10% in gold (GLD) or short-duration Treasuries (SHY) to cushion against trade shock scenarios.
7. Diversify Geopolitically: Avoid overconcentration in regions like the Middle East or Southeast Asia; spread exposures across Europe, EM Asia, and Canada.

Conclusion: The Rebalance Isn't Over—It's Just Begun

The numbers are clear: the era of U.S. equity dominance is waning. Investors are voting with their wallets, driven by valuation gaps, soft landing optimism, and a belief that non-U.S. markets are better positioned for the next phase of global growth. But this isn't a free pass—hedging remains critical. For long-term portfolios, the path forward is clear: overweight international equities, but keep one eye on the horizon for the storms that haven't yet passed.

In this new landscape, the smart money isn't just going global—it's staying vigilant.