Rebalancing the Portfolio: Why Now is the Time to Shift Away from Overvalued US Tech and Embrace Global Value Plays

The world’s largest investment bank, Morgan Stanley, has issued a bold “overweight” call on U.S. equities for 2025, citing resilient corporate earnings and a weakening dollar. Yet beneath its bullish headline lies a critical question: Is the U.S. market truly undervalued, or are investors overlooking a historic opportunity in overlooked global markets and underappreciated cyclical sectors?

The Overvaluation Trap in U.S. Tech/AI Stocks

Morgan Stanley’s enthusiasm for U.S. equities is rooted in tech-driven productivity gains, echoing the late 1990s tech boom. While the “Magnificent 7” tech giants (Apple, Microsoft, Amazon, etc.) have fueled S&P 500 gains this year, their valuations now border on irrational.

Tech stocks trade at 40%+ premiums to their historical averages, while small-cap and value stocks languish near 20-year lows. This divergence is unsustainable. History shows that when growth stocks outperform value by this margin, a mean-reversion correction typically follows. Investors clinging to AI-driven momentum may be in for a rude awakening when earnings fail to justify these stratospheric valuations.

The Dollar’s Overextended Run

Morgan Stanley forecasts the U.S. dollar to weaken to DXY 91 by mid-2026, a view that underestimates the risks of a global liquidity rebound. As the Fed pauses its rate hikes and inflation eases, capital is already flowing to higher-yielding emerging markets. Yet the dollar’s decline is only just beginning.

A weaker greenback benefits global cyclical sectors—from European industrials to Asian exporters—while punishing U.S. tech giants reliant on dollar-denominated overseas profits. This shift creates a “sweet spot” for investors to pivot toward undervalued non-U.S. equities.

The Case for Global Value and Cyclical Plays

While U.S. markets remain crowded, three opportunities are ripe for contrarian investors:

1. Emerging Markets: The Undervalued Engine of Growth

Morgan Stanley’s focus on U.S. equities overlooks the 20%+ undervaluation discount of MSCI Emerging Markets compared to the S&P 500. Countries like India and Indonesia boast robust GDP growth, while China’s stabilization post-trade deal creates a “buyers’ market” in manufacturing and tech.

2. Small-Cap Value: The Forgotten Corner of the Market

U.S. small caps (Russell 2000) trade at half the valuation of the S&P 500, yet offer superior earnings leverage to global recovery. Sectors like industrials and financials—poised to benefit from infrastructure spending and rate-sensitive lending—are particularly compelling.

3. Cyclical Rebound: Betting on a Global Recovery

The “reopening trade” is far from dead. Airlines, materials, and energy stocks in Europe and Asia are pricing in a recession, yet Morgan Stanley’s own data shows single-digit S&P 500 gains in 2025 leave room for cyclical outperformance.

Why Act Now?

The risks of inaction are stark. U.S. tech stocks face three catalysts for correction:
- Earnings downgrades: Analysts have already slashed 2025 S&P 500 estimates from 11.4% to 6.9% growth.
- Policy headwinds: Geopolitical tensions and debt ceiling battles could reignite volatility.
- Mean reversion: Value stocks have underperformed growth by 40% since 2020—the longest divergence in 50 years.

Portfolio Action Plan

1. Trim U.S. Tech Exposure: Reduce allocations to Nasdaq-heavy ETFs (QQQ) and rotate into global tech ETFs (IXN, ACWX).
2. Go Long on the Dollar’s Decline: Use inverse USD ETFs (UDN) or currency-hedged international funds (HEFA, CWB).
3. Target Small-Cap Value: Focus on Russell 2000 sectors like industrials (IYJ) and financials (IYF).
4. Global Cyclical Plays: Allocate to European industrials (EUI) and Asian materials (FEAR).

Final Warning: Don’t Be the Last to Exit

Morgan Stanley’s bullish call is a siren song for momentum investors. But as history repeats itself, the smart money is already shifting toward global value and cyclical resilience. The time to rebalance is now—before the inevitable correction forces you to sell at a discount.

The market’s next leg higher won’t be powered by overvalued U.S. tech. It will belong to those bold enough to look beyond Wall Street’s consensus.