Global equity portfolios are more concentrated in US equities than at almost any point in modern financial history. For many investors this is not an active decision. It is the accumulated result of passive flows, benchmark construction and a prolonged period of US outperformance that has made the position invisible rather than a bet to be examined.
That invisibility is precisely the problem, as positions become dangerous not when they are contested but when they are unexamined.
The US accounts for around 65% of the MSCI All Country World Index, roughly double its share in the early 1990s and more than four times its proportion of global GDP.
This imbalance is self-reinforcing. In a market-cap-weighted index attracting continuous passive inflows, each new dollar is allocated in proportion to current weights, meaning the largest constituents receive disproportionate flows regardless of their relative returns. This aggregate consequence of passive flows makes the feedback loop fragile in ways not yet reflected in prices.
Valuations
One of the clearest arguments for reassessing this positioning lies in valuations. US equities trade at a substantial premium to the rest of the world on conventional metrics and that premium sits above US equities' own historical range.
The standard rebuttal is not unreasonable as the US clearly has deeper capital markets, stronger property rights, more dynamic labour markets and a technology sector without rival.
Some premium is warranted. But whether the US deserves some premium is a different question from whether it deserves this one.
This matters as starting valuations are among the most reliable long-run predictors of returns. Investors allocating at current US multiples implicitly accept lower expected forward returns, whether near-term performance stays robust or not.
Conversely, UK equities, for example, combine depressed relative valuations with a currency that remains materially undervalued. Buying UK equities today means acquiring cheap assets in a cheap currency. This combination, a double margin of safety, is unusual in developed markets.
Why the mispricing persists
Mispricing is more structural than behavioural. Institutional investors operate within benchmark-driven frameworks where deviating from consensus carries asymmetric career risk.
Being wrong while different is more damaging than being wrong alongside others. A fund manager who cuts US equity exposure and underperforms a benchmark with 65% US weight faces an immediate and explicable career consequence, even if the decision is correct over a five-year horizon.
This creates a stable equilibrium of shared overexposure that will not unwind gradually as information accumulates. It will unwind when something triggers coordinated repositioning.
The dominance of US technology and the AI narrative have further entrenched this position. Believing AI is the most consequential technology since the internet is not obviously wrong. But narratives and returns are different things.
Current valuations embed an assumption of earnings that leaves little room for disappointments or multiple compressions that have historically followed periods of concentrated market leadership. Crowded trades do not unwind because the thesis is wrong. They unwind when the marginal buyer disappears.
Reconstitution risk also matters because the US could reassert index dominance through the next wave of technological leadership. But, even in that scenario, while the overall US equity weight might remain intact, the bulk of returns would likely accrue to early and mid-stage companies rather than to passive investments in indices dominated by incumbent firms.
Geopolitical risks are shifting
For decades, US assets have been treated as the safe core while risks originate elsewhere. That assumption is harder to sustain today. Policy volatility, trade fragmentation and institutional strain are now domestic US phenomena rather than external shocks.
A heavy allocation to US equities is no longer a straightforward hedge against geopolitical risk. In important respects, it has become the geopolitical risk.
The structural underpinning of US asset demand is also shifting quietly. Reserve managers from Tokyo to Beijing have both been reducing their holdings of US treasuries and accumulating gold and real assets.
The dollar's exorbitant privilege, the mechanism by which reserve currency status compresses US borrowing costs and supports valuations across the US asset complex, is not collapsing. But the direction of travel is clear and, for asset pricing, direction matters as much as speed.
History's lesson
A century ago, British assets enjoyed the portfolio position which the US holds today. Sterling was the reserve currency and London was the centre of global finance. The transition to US hegemony unfolded across decades before its market consequences arrived.
The lesson here is that market leadership tends to persist far longer than fundamentals justify and may correct faster than investors expect. Waiting for definitive confirmation of a regime shift is equivalent to paying the full price of adjustment.
There are already tentative signs of rotation. The FTSE 100 has outperformed the S&P 500 over the past year on a total return basis, reflecting both valuation support and sector composition.
Yet this shift has received limited attention from benchmark-driven investors, for whom such divergences are often obscured.
What to do
Our suggestion is not a dramatic rotation. Instead, the right response is a gradual reduction in US equity weight, directed toward markets where the valuation case is clearest.
This appears to be the UK, selectively continental Europe and emerging markets, where improving dynamics and attractive starting valuations offer genuine risk premia. Currency deserves explicit attention too.
A portfolio overweight in US equities carries, implicitly, a substantial long-dollar position. As the structural dollar bid moderates through reserve diversification and multipolar trade settlement, that exposure could become a headwind to returns independent of what US equities themselves do.
The objection that the US is still the strongest market is both true and beside the point.
The argument is not that US equities will deliver negative absolute returns. It is that the risk-adjusted case for a 65% weight is weaker than at any point in recent decades.
A longer treatment of the evidence, including formal welfare analysis, is available in our full research note. The cost of acting early is a modest tracking error. The cost of acting late is losing the adjustment.
Matt Roberts is head of alternative solutions and Dan Wales is an economist at Fulcrum Asset Management. The views expressed above should not be taken as investment advice.