Once upon a time, “America First” was a powerful slogan attracting global capital. However, this halo is gradually dimming. Investor preferences are undergoing a profound shift—funds are beginning to flow from the U.S. stock market to European and Asian markets.
Looking back at February this year, the S&P 500 index fluctuated around historical highs, with selling pressure and buying orders offsetting each other, ultimately leaving the index almost stagnant. In contrast, overseas markets appeared vibrant. The MSCI All-Country World Index excluding U.S. stocks rose nearly 5%, significantly outperforming the U.S. benchmark index, marking its largest outperformance since the deep plunge period of the 2008 financial crisis. Entering 2026, the performance of the U.S. stock market has lagged behind global stock markets by over 9 percentage points. In fact, this trend began to emerge last year when international stock markets outperformed their U.S. counterparts by 12 percentage points, the widest margin since 1993.
Behind this shift in investment direction lies the long-term accumulation of multiple factors. The over-reliance of the U.S. economy on technology stocks makes it highly vulnerable to sectoral transformations like artificial intelligence. Concurrently, the Trump administration’s vacillating trade policies make it difficult for companies to formulate long-term plans. More importantly, U.S. assets have led the pack for many years, and market expectations are growing for a new leader to emerge.
Recently, when investors scrutinized European and Asian markets, they spotted a key difference: companies in these markets boast valuations far lower than those in the U.S., yet offer similar earnings growth prospects. Alessandro Valentini, a director at Causeway Capital Management, pointed out that the equity risk premium in the U.S. has fallen to near zero, while it remains higher in other markets, implying better compensation for taking on risk—a factor that has become particularly crucial after experiencing market volatility in 2025.
Market turbulence itself has also become one of the driving forces. The Cboe Volatility Index (VIX) has breached 20 multiple times this year, with actual volatility reaching its highest level since last November.
Capital flow data confirms this trend. According to tracking by Bank of America, the proportion of funds flowing into U.S. equity funds has significantly decreased. For every $100 flowing into equity funds this year, only $26 has gone to the U.S. Michael Hartnett, Chief Investment Strategist at Bank of America, stated that the unpopularity of U.S. stocks relative to their international counterparts has persisted for over five years. Aniket Shah from Jefferies Group noted that U.S. policy volatility paradoxically becomes a long-term positive for the rest of the world, prompting investors to reconsider the necessity of heavily weighting U.S. assets.
So, where exactly is the capital flowing? Adrian Helfert, Chief Investment Officer for Multi-Asset Strategies at Westwood, believes that Europe’s industrial, defense, and banking sectors are the most attractive. Increased government spending on infrastructure, energy, and defense in Europe will directly boost these industries, and financial companies will also benefit. This is not merely a simple “risk-off” trade, but a structural revaluation still in its early stages.
Although the S&P 500 index is not far from its all-time high, its price-to-earnings ratio based on expected earnings over the next 12 months remains above 20 times, significantly higher than other markets. Furthermore, the potential weakening of the U.S. dollar adds to the positive factors for emerging markets. Jung In Yun, CEO of Fibonacci Asset Management Global in Singapore, projected that if current dynamics lead to a structural weakening of the dollar, the case for geographical diversification becomes even stronger. When that happens, crowded positions in the U.S. market will be subject to profit-taking, funds will gradually rotate to other global stock markets, and liquidity will diffuse outward from large-cap tech stocks—the likelihood of this scenario unfolding is increasing.
