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

Asset allocation in a world of riskier developed markets

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

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.