This year has seen a dramatic shift in markets with U.S. equity leadership giving way to a resurgence in overseas shares.
“The bubble in American exceptionalism has been building for years. The overdue rebalancing of global markets has just begun and is likely to be playing out for a long time,” writes Ruchir Sharma.
One warning sign in this regard was recently seen in a measure of stock market breadth that hit a record low. As Jim Paulsen notes,
“The stock market usually struggles when correlation is as low as it is today. Six of the eight bear markets since 1980 have occurred when the intra-correlation was below average, and none have occurred when correlation was in its highest quartile.”
And a new bear market in U.S. stocks could mark the end of the bear market in diversification. Bloomberg reports,
“Before 2025, Meb Faber’s Global Asset Allocation model had trailed the US large-cap index in 14 out of 16 years, a stretch without precedent over the last century. Now it’s poised for the best return relative to the S&P 500 since its inception.”
If so, passive investors may want to consider not only their overall exposure to U.S. equities but also the composition of that exposure.
“The U.S. economy has changed tremendously in the past 40 years. Not one of the 10 largest U.S. businesses in 1984 is still on the list in 2025. Yet the U.S. macro economy remains as well diversified as it was 20 or 40 years ago.
As a result, in terms of aggregate economic size, the 10 largest U.S. companies have remained far more stable—and far less concentrated—than the cap-weighted stock market,” reports Research Affiliates.
Diversification within and across financial markets, of course, is important. But just as important may be diversification beyond financial assets and into real assets, as well, a theme that is already showing promise.
“The broader market is under pressure while the Tangibles part of the market is showing resiliency – gold marches higher while energy remains robust despite concerns of oversupply in a softening economy,” writes Wasif Latif.
