Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 599

Read this before you go all in on US equities

US equities rule global markets, but history is littered with examples of markets that seemed invincible — until they weren’t.

Forecasting market returns is a fool’s errand, as history has repeatedly shown. Few predicted the 2023 AI-fuelled US tech rally after a bruising 2022, or the sharp bond selloff caused by stubborn inflation. There’s only one certainty: markets remain unpredictable. It’s a feature, not a bug.

For the past decade, US equities have been the undisputed stars, delivering an extraordinary run. The S&P 500, powered by the FAANG/Magnificent Seven stocks1, has vastly outperformed the majority of its global peers, giving rise to the US exceptionalism narrative.

But no market dominates forever. Japan ruled the 1980s, emerging markets were the darlings of the 2000s, and even Europe has had its moments in the sun. The US, while formidable, is not immune to weak performance.

This raises a critical question for investors: should you go 'all in' on US equities, riding the momentum of their recent strength, or should you consider a more diversified approach? After all, the smart money forecasts risks, not returns.

Diversification isn’t always as it seems

The conventional response is to allocate to global equities, such as the MSCI All Country World Index (ACWI), which spreads exposure across regions but remains heavily skewed towards US equities. That means a downturn in the US — whether sparked by rising interest rates, US President Donald Trump’s policies, Chinese AI developments, or any other unknown — can still leave your portfolio vulnerable.

Shifting the focus from returns to risk and constructing a portfolio that allocates based on diversification and risk balancing can produce a more robust solution. As Figure 1 shows, the ACWI concentrates heavily in US equities, while a risk-based approach allocates more evenly across regions such as Europe, Japan, and emerging markets. This ensures portfolios are better diversified and less tethered to the fortunes of one economy.

Figure 1. A balanced approach to global diversification

Source: MSCI, Man Group, as at January 2025.

While the S&P 500 has delivered strong returns over the past two decades, a risk-based allocation has delivered better risk-adjusted returns. As Figure 2 shows, a risk-based allocation outperforms both the S&P 500 and the MSCI ACWI Index in terms of Sharpe ratio (i.e., investors are better compensated for every unit of risk they take on). Crucially, this approach doesn’t require a crystal ball. It is not about predicting the next big winner but about creating a portfolio that is designed to navigate diverse market conditions without sacrificing upside potential.

Figure 2. Better risk-adjusted returns

Source: Bloomberg, Man Group, as at January 2025.

In equity investing, while risk-adjusted metrics like the Sharpe ratio are valuable, they rarely satisfy investors on their own. In risk-on environments, the focus inevitably shifts to delivering absolute returns — because, as the old adage goes, ‘you can’t eat Sharpe ratio.’

As Figure 3 highlights, a risk-based allocation strategy not only outpaced the MSCI ACWI but also kept pace with the S&P 500, doing so at a lower volatility — a compelling proposition for investors.

Figure 3. A smoother ride – the returns of a risk-based approach compared with the MSCI ACWI and the S&P 500

Source: Bloomberg, Man Group, as at January 2025.

The allure of US equities is understandable. They have been the stars of the investment world for years, and their track record is hard to ignore. But history is littered with examples of markets that seemed invincible—until they weren’t.

So, before you go 'all in' on the US juggernaut, consider whether there’s a better way to diversify. Because in investing, as in life, betting everything on one idea is rarely the safest path.

 

All data Bloomberg unless otherwise stated.
1. FAANG was the original group of tech superstar stocks Facebook (now Meta Platforms, Inc.), Amazon, Apple, Netflix, Google (now Alphabet, Inc.), that morphed into the Magnificent Seven, dropping Netflix, and adding Nvidia, Tesla and Microsoft.

 

Contributors: Tarek Abou Zeid, Partner, Client Portfolio Manager, Man AHL, Peter Weidner, Head of Total Return Strategies, Man AHL, Max Buchanan, Client Portfolio Management Analyst, Man AHL and Katerina Koutsouri, a quantitative analyst at Man AHL. Man Group is a fund manager partner of GSFM, a Firstlinks sponsor. The information included in this article is provided for informational purposes only.

For more articles and papers from GSFM and partners, click here.

 

RELATED ARTICLES

Investing across deflation, inflation and stagflation

Sin stocks, divestment and the right to choose

Negative correlations, positive allocations

banner

Most viewed in recent weeks

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

The challenges with building a dividend portfolio

Getting regular, growing income from stocks is tougher with the dividend yield on the ASX nearing 25-year lows. Here are some conventional and not-so-conventional ideas for investors wanting to build a dividend portfolio.

How much do you need to retire?

Australians are used to hearing dire warnings that they don't have enough saved for a comfortable retirement. Yet most people need to save a lot less than you might think — as long as they meet an important condition.

Welcome to Firstlinks Edition 594 with weekend update

It’s well documented that many retirees draw down the minimum amount required and die with much of their super balances untouched. This explores the reasons why and some potential solutions to address the issue.

  • 16 January 2025

Latest Updates

Investment strategies

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

9 ways to fix Australia's housing crisis

Decades of policy failure have induced a fall in housing affordability. Unless painful changes are made, an underclass will emerge in a society that is supposed to boast the one of the world's highest standards of living.

Shares

Australia: why the chase for even higher dividend yields?

Australia boasts one of the world's highest dividend yielding sharemarkets, providing substantial benefits to investors and retirees. Despite this, individuals often stretch for even more yield, to their detriment.

Shares

MIGA – Make Income Great Again

The Australian sharemarket seems to be rewarding a number of unprofitable companies on the promise of future riches. Yet profits and cashflows still matter, as a recent case study of Domino's Pizza shows.

Shares

Mapping future US market returns

Exceptional returns from the US sharemarket over the past decade have driven by sales growth, margin expansion, rising valuations, and dividends. Predicting future returns requires careful consideration of these factors.

Shares

Read this before you go all in on US equities

US equities rule global markets, but history is littered with examples of markets that seemed invincible — until they weren’t. Diversification will be key for investor portfolios going forwards.

Property

What impact would scrapping stamp duty have on housing?

Increasing house prices pose challenges for housing affordability. This investigates the impact of stamp duty on the property market, and how removing the tax could help address several key issues.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.