A flurry of reversals in tariff policy in the US has global investors once again assessing how much of their equity allocation belongs there – and the relative advantages of rebuilding exposure to developed markets outside the US.

Concern about the surging valuations of US mega cap tech stocks – and US equities generally – was already encouraging investors to re-evaluate their exposure to the world’s largest stock market.

The S&P 500 trades at roughly 21.8 times the expected earnings of its components, while stocks in Europe trade at roughly 15 times forward earnings, and those in Japan and China trade at 17 and 13.5 times respectively.

Analysts say that valuation gap is leading to outflows from US equities as investors search of cheaper exposure elsewhere. In the last six months, US-domiciled investors alone pulled about USD$75 billion from US equity products, with USD$52 billion flowing out since the start of 2026, the most in the first eight weeks of the year since at least 2010, according to LSEG/Lipper data.

Bank of America’s February fund manager survey also showed investors switching from US equities into emerging market equities at the fastest rate in five years – and flow data suggests that this “look offshore” instinct is appearing in developed markets. LSEG/Lipper data (via Reuters) shows US investors adding exposure in Europe and Japan.

Improving relative performance offshore is another factor driving investment decisions.

After more than a decade of US dominance, 2025 saw a reversal in a longstanding pattern of US outperformance. Fund manager Alliance Bernstein says US equities beat non-US peers for 11 of the past 15 years – but that pattern reversed in 2025 as the MSCI EAFE Index of non-US developed world stocks jumped by 31.2% in US-dollar terms, while the S&P 500 rose 17.9%.

Allocators shift focus

Vanguard’s 2026 outlook forecasts developed market equities ex-US among three market segments with the strongest risk-return profiles over the next five to 10 years, reflecting both relative valuations and a broader opportunity set beyond the US mega-cap complex.

On Vanguard’s 10-year projections, developed markets ex-US equities are expected to deliver roughly 6.8% and 7.3% in AUD terms , compared with an expected 4.5-5.5% annualised return for US equities over the same horizon.

Vanguard’s reasoning for the more muted outlook for US stocks returns to its view that “non-AI scalers” – or those companies not directly exposed to the high valuations of the AI investment cycle – such as US value stocks and developed markets ex-US equities, offer much more attractive valuations and “have yet to price in the potential long-term benefits of AI adoption.”

Cambridge Associates also argues investors should modestly overweight global equities outside the US in 2026, saying the outperformance seen in 2025 is likely to persist.

“We recommend that most investors modestly overweight global ex US equities from US equities. This view is founded on attractive relative valuations, improving regional growth catalysts outside the US, and rising concentration within US equities,” Cambridge senior investment director Thomas O’Mahony wrote in a 2026 outlook note.

A weaker USD – and forecasts for continuing weakness – underpin Cambridge’s strategic case for allocating to developed markets outside of the US.

Cambridge says the USD remains materially overvalued (about 32% above its median real valuation) and expects it to decline further in 2026, boosting unhedged returns for non-US investors and improving the relative earnings backdrop for many offshore markets.

Currency tailwinds

In a recent analysis Will US stocks beat the rest in 2026, Betashares backs ex-US developed market equities (Europe and Japan) to outperform US equities AUD terms (on an unhedged basis) in 2026.

Until now, says Betashares analyst Cameron Gleeson, some of the US equity premium has been justified by the higher profitability and greater earnings stability of the companies that dominate US indices – but stresses “the question for 2026 is whether this premium should be more or less than 30%.”

He recently wrote that Europe and Japan’s longer term consensus earnings growth may be more modest than the US – but several factors could mean they outperform, nonetheless.

“A ramp up of European fiscal stimulus should start to … take effect in 2026, increasing the probability of earnings upgrades. Meanwhile earlier, Japanese growth has upside under Takaichi’s leadership,” he wrote.

A recent Alliance Bernstein report emphasised the importance of non-US equities as diversification tools within US-heavy global equity allocations – but noted that US shares are likely to remain a key part of portfolios.

“While things are looking up for non-US stocks, we believe US equities still have an important role to play in global allocations . But following a period in which many investors’ allocations to the US have increased, non-US equities could help balance allocations by tapping into a broader array of return drivers around the world,” it says.

“Some of the largest companies not based in the US may have extensive operations stateside. Similarly, many companies based in Europe, Asia or emerging markets have global revenue streams that aren’t necessarily affected by their home country’s macroeconomic conditions.”

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