Is the US Stock Market's Reign Over? Rebalancing to Global Value

The US equity market's dominance over the past decade has been nothing short of extraordinary. From the rise of megacap tech titans to relentless buybacks and dollar strength, investors have grown accustomed to US stocks outperforming global peers. But a seismic shift is underway. Today, the MSCI World ex-US Index—the benchmark for international developed markets—is trading at its largest valuation discount to US equities in 50 years, according to research by Schroders' John Chisholm. Meanwhile, corporate buybacks in regions like the UK are surging, signaling a rebalancing of global equity allocations. For investors, this marks a critical juncture: the era of US exceptionalism may be ending, and reallocating capital to underloved international markets could be the defining opportunity of the next decade.

The Valuation Gap: A 40% Discount for Non-US Equities

The most compelling argument for rebalancing is the historical valuation disparity between US and international stocks. By the end of 2024, the MSCI World ex-US Index was trading at a 40% discount to the S&P 500 on trailing price-to-earnings (P/E) ratios, with a median discount of 20% across industries. This gap isn't a fluke—it's a trend stretching back decades.

The divergence is stark. While US stocks, particularly the "Magnificent Seven" tech giants (Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia, and Tesla), have soared to stratospheric valuations, non-US markets have languished. Even excluding these megacaps, the US market maintains a valuation premium. For instance, the MSCI ACWI Index—which includes global equities—now allocates nearly 20% of its weight to just seven tech stocks, while the rest of the world's companies are priced at a steep discount.

This imbalance is unsustainable. Historically, such valuation gaps have corrected through either US markets falling or international markets rising. Given the extreme overvaluation of US equities—the S&P 500's CAPE ratio (cyclically adjusted P/E) hit 33.9 as of May 2025, a 37% premium to its historical average—the odds favor a mean reversion that benefits non-US stocks.

Structural Shifts: Buybacks and the Rise of Non-US Markets

The valuation discount isn't the only catalyst for change. Structural shifts in corporate behavior are tilting the scales toward international equities.

Take the UK, where over 50% of large-cap companies repurchased at least 1% of their shares in the 12 months ending June 2025—a dramatic rise from pre-pandemic levels. This surge in buybacks is reducing the supply of shares and boosting demand, a dynamic that could narrow valuation gaps. Meanwhile, the US's reliance on a handful of overvalued tech stocks leaves it vulnerable to sector-specific headwinds, such as regulatory scrutiny or slowing innovation cycles.

The MSCI World ex-US Index's P/E ratio of 16.36 as of December 2024 (overvalued but far cheaper than the US) contrasts sharply with the 24.55 P/E of the broader MSCI World Index, which includes US equities. This suggests international markets are priced for disappointment, even as fundamentals improve. For example, Europe's corporate profits have grown steadily, and the UK's post-Brexit reforms are boosting competitiveness.

Why Reallocate Now?

The case for rebalancing is both tactical and strategic. Tactically, international markets are outperforming in 2025. The MSCI World ex-US Index is up 18.1% year-to-date through July, while the S&P 500 has gained just 6.4%. This performance reflects a rotation away from overvalued US tech and into cheaper, undervalued sectors abroad.

Strategically, the risks of concentration in US markets are mounting. The S&P 500's heavy weighting in tech (over 30% of the index) leaves it vulnerable to sector-specific downturns. Meanwhile, the MSCI World ex-US Index offers diversification into regions like Europe, where valuations are more reasonable and buybacks are accelerating.

Investment Recommendations

Investors should consider the following steps:

1. Reduce exposure to US megacap tech stocks: Their valuations are extreme, and their dominance may fade as global markets rebound.
2. Increase stakes in international developed markets: ETFs like the iShares MSCI EAFE ETF (EFA), which tracks European, Australian, and Far East equities, offer access to regions with improving fundamentals and valuation discounts.
3. Focus on sectors with global demand drivers: Energy, healthcare, and industrials—sectors less concentrated in US markets—could benefit from rising global economic activity.

Risks and Considerations

No strategy is without risk. A sudden US dollar rally or a recession in Europe could pressure international equities. However, the current valuation gap is so extreme that even modest outperformance by non-US markets could generate significant returns.

Conclusion: The Time to Rebalance Is Now

The US stock market's exceptionalism has been fueled by a mix of tech dominance, dollar strength, and corporate buybacks. But with valuation discounts at 50-year extremes and structural shifts like surging non-US buybacks, the pendulum is swinging back. For investors, this is a rare opportunity to capitalize on mean reversion in global equities. The era of US exceptionalism may be ending—but the era of value-driven international investing is just beginning.