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.

 

  •   19 February 2025
  • 2
  •      
  •   

RELATED ARTICLES

Investing across deflation, inflation and stagflation

Sin stocks, divestment and the right to choose

Asset allocation in a world of riskier developed markets

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Retirement

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Financial planning

How much does it really cost to raise a child?

With fertility rates at a record low, many say young people aren’t having kids because they’re too expensive. Turns out, it’s not that simple and there are likely other factors at play.

Exchange traded products

Passive ETF investors may be in for a rude shock

Passive ETFs have become wildly popular just as markets, especially the US, reach extreme valuations. For long-term investors, these ETFs make sense, though if you're investing in them to chase performance, look out below.

Shares

Bank reporting season scorecard November 2025

The Big Four banks shrugged off doomsayers with their recent results, posting low loan losses, solid margins, and rising dividends. It underscores their resilience, but lofty valuations mean it’s time to be selective. 

Investment strategies

The real winners from the AI rush

AI is booming, but like the 19th-century gold rush, the real profits may go to those supplying the tools and energy, not the companies at the centre of the rush.

Economy

Why economic forecasts are rarely right (but we still need them)

Economic experts, including the RBA, get plenty of forecasts wrong, but that doesn't make such forecasts worthless. The key isn't to predict perfectly – it's to understand the range of possibilities and plan accordingly.

Strategy

13 reflections on wealth and philanthropy

Wealth keeps growing, yet few ask “how much is enough?” or what their kids truly need. After 23 years in philanthropy, I’ve seen how unexamined wealth can limit impact, and why Australia needs a stronger giving culture.

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.