World Equity Allocations: Global in Name Only?

Asset owners who build their equity exposure through allocations to global managers are likely holding portfolios that have grown highly concentrated in terms of country, sector, and individual stock exposures. That reflects the evolution of the global equity market portfolio, which now could pass for a U.S. large-cap core supplemented by regional satellite allocations. In Figure 1, the dark-blue line traces out the weight of the U.S. in the MSCI World Index over nearly half a century, including its steady ascendence after the global financial crisis (GFC). Not only is the benchmark unusually concentrated in the U.S., but its weight in technology exceeds that from the peak of the dot-com bubble (light-blue line).¹ In recent years, these concentrations have been exacerbated by the Magnificent Seven, whose dominance has also lifted the weight of the largest ten stocks to levels last seen in the 1980s (gray line).

Figure 1: MSCI World Index – Facets of Concentration 

Is the Benchmark Wrong or Just Unusual?

Even though the current composition of the benchmark might look unusual, to an academic economist, it isn’t inherently problematic.² The Capital Asset Pricing Model is silent about the market portfolio’s concentration in countries, sectors, or stocks. The market portfolio is efficient, whatever its composition. Even in the messy real world, this abstract view is a valuable starting point because it sets an appropriately high evidentiary standard to justify an active tilt away from the benchmark.³

Nevertheless, reflecting on the state of markets in late 2025, we believe that there is indeed a persuasive case for curbing the U.S. weight in global allocations. 

Expected Returns 

First, valuations of U.S. equities give us pause. In Figure 2, the left panel shows that U.S. forward P/E, near 23, has risen back towards levels from 2021 (as has the CAPE), when there was evidence of a bubble in U.S. tech stocks that partially deflated during the 2022 growth-led sell-off.⁴ In the cross section, U.S. equities trade at a high valuation premium relative to other developed markets like Europe (~14.5) and Japan (~16). Moreover, the right panel of Figure 2 shows that the current gaps in forward multiples are large across many sectors, not just in technology. As we’ve noted, our instinct is that the divergences are too wide: outside the U.S., earnings growth has surprised positively without comparable valuation rerating, leaving room for relative upside.⁵

Figure 2: Price-to-Forward Earnings Ratios – U.S. versus the Rest of DM

Our suspicion is that a simple story is at work: investors are overextrapolating a prolonged period of strong earnings growth associated with U.S. technology firms. After all, this would be the norm. Seen through the lens of a behavioral economist, there is strong evidence that such extrapolation contributes to the value premium/growth underperformance in equities, and we would expect the tendency to be all the more pronounced given the enormous challenge of predicting the long-term impact of major changes in technology.⁶ In present circumstances, therefore, we think it’s prudent to prepare for some reversion of relative valuations.

We wouldn’t be surprised, too, if the U.S. weight in the benchmark also reflects extrapolation of the U.S. dollar’s strength since the GFC. Dollar appreciation significantly undermined European and Japanese stocks’ contributions to MSCI World USD returns. Going forward, however, investors shouldn’t bank on further USD strength. Over the long term, DM currencies haven’t reliably provided either a headwind or a tailwind to USD returns of non-U.S. equities. Indeed, 2025 has seen a reversal of the trend of prior years, with dollar weakness materially contributing to the strong USD outperformance of non-U.S. DM equities.⁷

Figure 3: Currency Contributions to MSCI Index USD Returns January – September 2025

Risk

Reinforcing this picture of stretched valuations, our instinct is that the market is underpricing risks to U.S. assets. U.S. macro and policy uncertainty remains historically high. This implies an unusually wide range of outcomes in play for U.S. fundamentals and sentiment as drivers of returns, which seems inconsistent with the benchmark’s concentration in the U.S. To bring that point into focus, in prior work we estimated that the U.S.’s roughly 70% weight alongside EAFE and EM in MSCI’s All Country World Index is consistent with a market view that the U.S. will outperform by at least 4% per annum (all in USD terms).⁸ Equal return expectations across regions would imply a U.S. weight of roughly 40%.⁹

Another contributing factor is the dependence of broad-market index valuations on one thematic driver, the AI trade. With investors of all stripes, institutional and retail, struggling to understand the implications of AI’s development for corporate profits—for firms that create or enable the technologies, firms that are vulnerable to displacement by them, and for customer firms across the economy—the U.S. equity market seems vulnerable to narrow shocks that could affect expectations of AI-driven profitability. DeepSeek’s emergence in January 2025 served as a cautionary example. Investors were confronted with the sudden arrival of a potential threat to the assumed ROIs of both foundation model providers and their hardware suppliers. Regulatory risk represents another potential wildcard.¹⁰

A More Appealing Global Portfolio?

In summary, we believe that rich U.S. valuations and elevated uncertainty give investors reasonable grounds to consider diverging from the world equity benchmark. Specifically, asset owners who have formed their equity allocations predominately through strategies tied to the global benchmark should contemplate rebalancing a portion of those holdings into dedicated DM ex-U.S. active portfolios. 

For such investors, there would be several benefits. In terms of concentration, the lean away from the U.S. would also naturally broaden sectoral and stock-level exposures. Figure 4 shows that the DM ex-U.S. benchmark is far less concentrated in technology than the U.S., with only a 9% weight versus 34%. It also shows that the flatter capitalization distribution found outside of the U.S. implies that the non-U.S. benchmark holds nearly six times the effective number of stocks (332 vs. 60).¹¹ While some investors might have a prior that non-U.S. equity markets tend to be more volatile, Figure 4 highlights that total volatility of the DM ex-U.S. benchmark has been slightly lower over the past five years (also true over the past ten).

Figure 4: Characteristics of Passive Benchmarks

At the benchmark level, the reallocation would involve a tradeoff in fundamentals that motivates staying active when leaning into non-U.S. equities. Looking across conventional trailing metrics, Figure 4 shows that while the DM ex-U.S. index has a P/E ratio that is 40% lower than the U.S. (17.5x vs. 28.7x), it also has materially weaker quality and growth characteristics (ROE of 12.3% vs. 19.3% and earnings growth of 13.5% vs. 23.4%). To first order, richer valuations in the U.S. are consistent with the exceptional profitability and earnings growth of U.S. technology and related sectors; the question is whether those valuations have risen too far.

Fortunately, DM ex-U.S. offers fertile ground for stock selection aimed at optimizing an active portfolio’s composite fundamental characteristics on a forward-looking basis. As evidence, Figure 5 shows that active managers have been able to add value in DM ex-U.S., especially in the small-cap end of the spectrum, where poorer information environments foster mispricings and poorer liquidity serves as a barrier to arbitrage.¹²

Figure 5: Active Manager Excess Return Distribution

In that light, reallocating a portion of active global exposure to dedicated active DM ex-U.S. portfolios can strengthen diversification, improve fundamental tradeoffs, and harness markets where active management has consistently delivered excess returns. 

Conclusion

Global investors face a choice of paying high prices for concentrated U.S.-driven growth or reaching for better value and broader exposures abroad. While a decision to diverge from the market portfolio’s allocations shouldn’t be taken lightly, we see it as justifiable based on rich U.S. valuations and elevated macro and political uncertainty. For many allocators, a tilt into non-U.S. equities will produce a portfolio with more appealing characteristics. In implementing such a tilt, investors would be wise to stay active to improve tradeoffs in fundamental characteristics and exploit a healthy opportunity set for stock selection.