The dollar's drop this year has supercharged the outperformance of global equities over Wall Street, yet U.S. investors remain heavily underweight foreign stocks. Americans playing catch-up could well magnify the gulf in returns through the rest of 2025. Investment strategists have spent much of the past three disruptive months poring over blizzards of data on cross-border fund flows, largely to support the narrative that foreign capital is fleeing U.S. assets due to President Donald Trump's policy upheavals. Get a look at the day ahead in European and global markets with the Morning Bid Europe newsletter. Sign up here. Advertisement · Scroll to continue
Report This Ad US investors still shy of overseas equities US investors still shy of overseas equities As is often the case, the reality is more prosaic than the fearful hand-wringing. Morgan Stanley's recent dive, for example, showed ongoing foreign demand for U.S. equities, just at a slower pace following the April 2 tariff shock. If anything, they found U.S. investors were marginal net sellers of domestic equities. "The sheer size of the U.S. stock market means it should still receive inflows, just less of them," Morgan Stanley's team concluded. Morgan Stanley charts on flows to US equity funds Morgan Stanley charts on flows to US equity funds And now that U.S. stock benchmarks are back at record highs after a 20% round trip, the mood has turned somewhat. The thinking in some quarters at least is that - tariff fears notwithstanding - the storm has passed and Wall Street can rely on tax cuts, renewed tech enthusiasm and deregulation. Advertisement · Scroll to continue
Report This Ad But the stark outperformance by many non-U.S. markets so far this year could yet mean 'FOMO' - or fear of missing out - may now come into play for U.S. savers looking abroad - mirroring the global scramble to load up on Wall Street in recent years. At the very least, more significant and overdue rebalancing of U.S. investment portfolios may be in store. The dollar's 10% decline against major developed market currencies (.DXY), opens new tab in the first half of 2025, and its 13% swoon against the euro in particular, is a key catalyst - potentially both driving and feeding off the investment switch. The MSCI all-country index that excludes U.S. stocks (.dMIWU00000PUS), opens new tab has climbed almost 17% this year, almost three times the 6% gain in the S&P500 (.SPX), opens new tab, flattered by currency gain on that index of more than 8%. The European Union says it plans to keep working towards a negotiated trade settlement with the U.S.
In dollar terms, euro zone stocks (.STOXXE), opens new tab have zoomed 27% higher so far this year, while Germany's DAX (.GDAXI), opens new tab boomed by 37% and Hong Kong's index (.HSI), opens new tab is up 20%. Chart compares performance of U.S. and European stocks also taking into account funding currencies Chart compares performance of U.S. and European stocks also taking into account funding currencies OVERSEAS FOMO David Kelly, Chief Global Strategist at JPMorgan Asset Management, makes the point that after years of exceptional U.S. stock gains, most investors are still heavily underweight non-U.S. assets. The prospect of further dollar weakness from here could well draw them out. "Even if it were an even bet whether the dollar and the exceptionalism premium would rise or fall going forward, investors are not positioned as if it were an even bet," Kelly wrote this week. "Prudence suggests they should spread their bets."
