Reassessing US Equity Allocation in a Shifting Macro Landscape: Lessons from 2025 YTD Performance

The U.S. equity market has delivered robust returns in 2025, with the S&P 500 posting a year-to-date (YTD) total return of 11.54% as of September 4, 2025, driven by strong earnings growth and a resilient corporate sector [2]. However, this performance must be contextualized within a broader landscape of diverging asset class returns and evolving macroeconomic dynamics. International equities, for instance, have outperformed U.S. stocks, buoyed by a weaker U.S. dollar and favorable policy developments abroad [1]. Bonds, particularly global bonds, have also fared well, while commodities have lagged—except for gold, which continues to serve as a safe-haven asset amid geopolitical uncertainties [4].

Diverging Returns and Policy Uncertainty

The U.S. equity rally has been accompanied by significant policy-driven volatility. Tariff-related disruptions, initially destabilizing, have given way to a more adaptive market environment, though risks remain. Geopolitical tensions, particularly in energy markets, have further complicated the outlook [1]. Meanwhile, fiscal stimulus in Germany and Japan has injected momentum into global growth, contrasting with the U.S. Federal Reserve’s cautious stance on rate cuts [6]. This divergence in monetary policy has amplified currency fluctuations, with the U.S. dollar’s weakness acting as a tailwind for international equities [3].

Investors are increasingly recalibrating their strategies to navigate these uncertainties. BlackRock emphasizes the need for low-volatility and defensive equity allocations, alongside alternative strategies such as inflation-linked bonds and gold, to mitigate correlation risks [1]. Similarly, Goldman Sachs highlights the growing importance of tail-risk hedges and broader equity exposure outside the U.S. as central banks’ policy moves become more constrained [2].

Strategic Rebalancing: Beyond U.S. Equities

The valuation gap between U.S. and international equities has widened, with Japanese and European value stocks trading at a 35% discount to their U.S. counterparts [3]. This dislocation presents opportunities for long-term investors, as Farther and Purpose Invest note that international markets are undervalued relative to their fundamentals [3][4]. However, State Street cautions that U.S. equities remain dominant, with their resilience concentrated in large-cap benchmarks like the S&P 500 [5].

For investors seeking to rebalance, the focus is shifting toward diversification across geographies and asset classes. High-yield corporate bonds and multifamily REITs are gaining traction for their liquidity and income potential, while single-family homebuilders face headwinds due to high mortgage rates [2]. Meanwhile, mid- and small-cap equities are outperforming large-cap peers, reflecting a broader market participation driven by attractive valuations [3].

The Path Forward

As 2025 progresses, the interplay of policy uncertainty and divergent returns will likely remain central to investment decisions. CFRA Research underscores the importance of quality stocks and sector-specific tactical plays, particularly in high-growth areas like technology and infrastructure [6]. Yet, the overarching theme is clear: a rigid focus on U.S. equities risks underperformance in a world where global diversification and alternative allocations are increasingly critical to managing risk [1].

In this shifting landscape, investors must balance the allure of U.S. equity strength with the need for resilience. Strategic rebalancing—leveraging international opportunities, defensive strategies, and alternative assets—will be key to navigating the macroeconomic crosscurrents of 2025.

Source:
[1] Mid-year market outlook 2025 | J.P. Morgan Research [https://www.jpmorgan.com/insights/global-research/outlook/mid-year-outlook]
[2] 2025 Fall Investment Directions: Rethinking diversification [https://www.blackrock.com/us/financial-professionals/insights/investment-directions-fall-2025]
[3] Strategic Asset Allocation in an Era of Structural Shifts [https://www.farther.com/post/strategic-asset-allocation-in-an-era-of-structural-shifts]
[4] Analyzing Q2 2025 active and passive asset classes [https://www.envestnet.com/financial-intel/analyzing-q2-2025-active-and-passive-asset-classes]
[5] Exceptions to US exceptionalism [https://globalmarkets.statestreet.com/research/portal/insights/article-html/3fb35876-38a6-4b62-93ff-f5d9bb6e1c04]
[6] U.S. Equity Market Outlook in 2025 [https://www.cfraresearch.com/blog/u-s-equity-market-outlook-in-2025/]