Time to realign: KBI Global Investors Q2 2025 Commentary.
- The US has an overvaluation problem, but it’s concentrated in tech
- Europe and Global ex US, offering better growth prospects, sees inflows rise
- Proactive realignment can mitigate concentration risk
Market overview: Q2 gives more reasons to look beyond US tech
Market overview: Q2 gives more reasons to look beyond US tech
We’ve long argued that a market rotation is the most likely outcome for equity markets over the medium to long term. Why? Because the over-concentration in US megacaps has led to extreme valuation anomalies and significant momentum distortions.
Other parts of the global equity market – whether regions, styles, sectors or market cap – that have been out of favour in recent years are likely to offer better performance in the future. Investors with concentrated US tech portfolios will be better served by more diversified global approaches.
US tech stocks have been the location of choice for global capital for almost a decade, siphoning foreign money away from worthy home-country opportunities. These opportunities are now getting more investor attention, in light of recent trade disruptions and the US’s fall in reliability as a team player in the global economy.
The drop in confidence in a global hegemonic market among investors, regardless of domicile, has helped non-US markets this year. A significantly improved earnings growth profile relative to US megacaps has also been a notable shift. Forecast EPS growth is now stronger in EAFE and EM for the first time since 2017.
There’s always noise in the short-term data, and markets can be very volatile from quarter to quarter – yet we see evidence unfolding of a continued trend towards broader diversification of equity portfolios and a renewed interest in investment opportunities beyond US tech.
The M7 names had a strong Q2, but so did many other types of stocks. Competition for market leadership is rising. This is particularly evident in flows of capital over the period. While the stock of global capital may not have been redirected in any meaningful way, the ongoing flows demonstrated a dramatic and significant shift in direction.
The US dollar continued to fall, declining by 12% since the start of the year. This marks its worst performance since 1973 – the year the Bretton Woods system was abandoned and the modern market for currency exchange emerged. The decline is despite higher levels of interest rates in the US, which makes it a very unusual selloff.
While many elements of a rotation were clear to see, styles have been massively volatile so far this year. Growth, having underperformed in the first quarter, outperformed in the second. We believe this is due primarily to the massive self-purchasing of shares by a handful of companies in markets with low turnover, resulting from a higher-than-normal level of uncertainty.
We devote much of this letter to looking at investor flows, which are clearly exploring opportunities outside of US megacap tech.
We also look at the turn in earnings growth profiles. Having led the rest of the world for EPS growth over the last decade, the US has now fallen behind.
Finally, we briefly revisit valuation differences. While the main US indices again achieved all-time highs, this was driven solely by multiple expansion.
To us, the strong rebound in US stock valuations reflects a worrying level of complacency, given the prevailing uncertainties. Despite the absence of any convincing resolutions on key global trade issues, investor sentiment has changed from extreme nervousness about the unpredictable policy approach to a blasé confidence that issues will be resolved positively. Historically high tariffs still apply for most countries trading with the US. The last time 10% tariffs were imposed on trading partners was in 1971.
For global capital, the US loses appeal.
After a long period of intense concentration in a few US megacaps, investors are beginning to explore opportunities outside the US market. Global ex-US funds, which have been out of favour for many years, attracted over USD2.5 billion in new money flows.
The FT reports that European and Asian investors put USD 2.5 billion into world ex-US mutual and exchange-traded funds between the start of December and the end of April, according to Morningstar data. These inflows mark a dramatic reversal after three years of net withdrawals.
Investors cite two reasons for this. Firstly, there’s an ongoing question mark over the reliability of the US’s role in the global economy. Some of the flows into ex-US funds have been described as “patriotic rebalancing”.
There’s a growing sense of discomfort among some investors, particularly in Europe, regarding investment in the US. Investors have grown fearful that sweeping tariffs could cause more harm to the US itself than to other major markets. On the other hand, Europe presents a new catalyst: an infrastructure and defence-led spending push that offers fiscal support and improved growth prospects.
A. Demand jumps for funds stripping out US stocks.
Source: Morningstar
The second reason for inflows into ex-US funds is the clear need for investors to rebalance their portfolios and diversify the overweight allocation to US megacap tech names. Positioning in these names is extremely crowded, with institutional portfolios, retail investors, and passive funds all heavily concentrated in this narrow segment of the market.
Amundi report that a large share of the money flowing into European funds since the Covid pandemic has gone into just two indices – the S&P 500 and the MSCI World, of which the US accounts for more than 70%. This concentration poses a risk of de-rating if sentiment shifts even modestly, as there is little remaining marginal buyer interest.
B. Holdings of global ex-US funds bounce back
Total assets ($bn)
Source: Morningstar
Similarly, data from LSEG’s Lipper Funds shows that more than USD 100 billion has flowed into European equity funds so far this year – up threefold from the same period last year – while outflows from the US have more than doubled to nearly USD 87 billion.
C. Europe’s equity boost
Source: LSEG
While the stock of global capital may not have been redirected in any meaningful way, the ongoing flows of retail money have shown a dramatic and consequential change in direction by investors outside the US.
The idea of US exceptionalism has been damaged; its natural appeal to global capital has eroded. For portfolios, this means a greater diversification in the allocation of new flows away from the dollar and US assets. The full extent to which foreign investors and institutions may yet divest from the existing stock of US assets remains to be seen.
D. Flows into foreign-domiciled US equity ETFs
Source: Bloomberg
The US market still manages to rise.
Foreign money flowed out, but domestic retail and buybacks hit all-time highs.
The conundrum for the quarter, then, is how to explain the US market’s 11% rise if foreign investors pulled out so much money. The answer seems to lie with fearless domestic US retail investors and a record-breaking level of buybacks, as US corporates bought back massive amounts of their own stock.
American retail investors are all in, buying at an unusually aggressive pace this year. Roughly half of US household wealth is now invested in stocks, breaking the record set during the dot-com bubble of 2000.
E. Aggregate allocation of US household wealth
Source: EPFR, Goldman Sachs Global Investment Research
While institutional investors withdrew funds from the US market in Q2, retail investors purchased index funds. This is consistent with their mantra: ‘Buy the dips.’
F. Monthly flows in 2025 in S&P 500 ETFs – institutional oriented vs retail oriented
Source: CFRA’s ETF database as at June 20 2025
US corporations are investing a substantial amount of money in supporting their own share prices. Based on Bloomberg data, 2024 set a record for buybacks in the US, with just under a trillion dollars of shares repurchased. It appears that this level will be exceeded well before the end of this calendar year.
It’s challenging to gather buyback data accurately in real-time. Companies can announce buyback programmes but then execute them over varying periods, and there can be different conventions for calculation. However, to obtain a guide, we can track companies’ announcements and compare them year by year. It’s worth noting that, according to our own research, historically, only about two-thirds of the announced buybacks have been implemented, so the historical figures may be overstated.
The chart below, from a joint Bloomberg and Deutsche Bank survey, shows the frequency of weekly buyback announcements since 1995.
Annual US stock buybacks are set to exceed $1trn for the first time
Sources: Deutsche Bank Asset Allocation, Bloomberg
The US market has just recorded the highest level of buyback announcements for a single quarter since 1995, when data on reported buybacks began to be collected. Corporate whispers suggest there’s more in the pipeline as they move to defend their valuations against a more difficult outlook. The size and speed of the buyback surge are driven by:
- cheaper prices after a Q1 selloff
- strong cash piles on the balance sheets
- Trade war worries are making planning more difficult.
S&P 500 data below, from a different source, paints a similar picture. It compares the level of buybacks in the first few months of this year with those in the same period of previous years. We can observe the gradual increase in repurchases over time, as well as the highs achieved so far this year.
H. Repurchasing announcements in the first four months of each year (to end April)
The amount of money likely to be deployed in 2025 as a whole is immense. Apple announced its intention to buy back USD 100 billion; Alphabet and Google announced plans to buy back USD 70 billion. These three stocks alone account for 20-25% of the estimated total for US share repurchases this year. (It’s not only in the market cap that we see high levels of concentration.)
Meanwhile, some industries – such as energy, utilities and materials – have chosen not to participate, and will return excess capital to shareholders exclusively in the form of dividends.
As of June 5, our data shows S&P 500 firms had announced approximately USD 750 billion in buyback authorisations – a pace notably ahead of past years’ levels at the same point. Since then, following the completion of the Fed’s stress tests at quarter’s end, some major banks have been quick to unveil additional buybacks: JPMorgan, USD 50 billion, and Morgan Stanley, USD 20 billion.
Stock buybacks became legal in the US in 1982 and have remained a feature of the technology sector. They’ve grown in popularity across the market since the corporate tax cuts of the first Trump administration in 2017. According to the Bloomberg study above, the reduction of corporate tax from 35% to 21% created corporate savings that have been used almost entirely to finance buyback programmes. These support share prices while also improving EPS by reducing the number of shares issued.
A notable change in earnings profiles
The key driver of US outperformance over the last decade has been a stronger earnings growth profile than other markets. While momentum and valuation have driven prices far, the underlying driver has always been US companies’ better earnings compared to their international competitors. That changed over the quarter and could mark a sea change in market dynamics.
There were markdowns in US earnings estimates as analysts priced in modest tariffs and inflation. According to FactSet, these reductions were larger than the average reduction over the last 15 years. And while they improved a little towards the end of the period, they’re now far behind the estimates for EAFE and EM earnings.
I: S&P 500: Sector-level change in Q225EPS
Source: FactSet
EAFE and EM earnings were marked up at a significant pace, much more so than US estimates. This is the first time since 2017 that the US has had a weaker EPS growth profile.
J. EAFE and EM 12-month forward EPS are now stronger than the US
Source: LSEG Datastream
While the market rebound had very poor breadth and was mainly focused on the M7 names, it lifted the S&P index as a whole. Only 44 stocks out of the S&P 500 drove the index to new all-time highs. Overlaying prices with EPS changes for the year to date, we don’t get an encouraging picture.
K. S&P 500 CY25 bottom-up EPS: December 31 – June 30
Source: FactSet
In addition to more positive earnings expectations, international markets have a valuation advantage and still trade at a big discount relative to the US.
L. Relative forward P/E ratio of US and non-US stocks
Source: KBIGI, LSEG, MSCI
Opportunities beckon beyond megacap tech
The US is not a homogeneous market. Indices and averages can hide opportunities.
In aggregate terms, US equities trade at ~22 times forward P/E, versus ~14 times in Europe. However, it’s important not to overgeneralise about regional valuations. It’s a concentrated problem with a specific segment of stocks, not the region as a whole.
Aside from megacap tech, many parts of the US market remain highly attractive. In fact, some segments of the US market – such as energy, financials, and industrials – are undervalued compared to other regional markets. These sectors are underrepresented in the leading US market indices but stand to benefit from secular shifts, such as deglobalisation, infrastructure renewal, and market rotation.
Tech is expensive, but many US stocks are cheap
Source: KBIGI, Datastream, S&P 500
The overvaluation problem in the US is a concentrated one, not a widespread one.
Market concentration is increasing
Source: FactSet, Goldman Sachs Global Investment Research
Where to turn next for upside potential
While US megacap technology stocks have delivered exceptional performance in recent years, we believe the case for continued relative outperformance is weakening. Structural, macroeconomic and valuation-related factors suggest that a market rotation – sectoral and size-wise within the US, and geographically across the globe – is increasingly likely.
We recommend reviewing current allocations to US megacap tech and evaluating opportunities in under-owned areas of the market with improving fundamentals and more favourable risk-reward profiles.
Leadership is broadening, and capital is flowing into historically overlooked areas. A proactive realignment today can help mitigate concentration risk and enhance forward-looking return potential. As global investors reconsider their concentration in US equities, Europe and Japan’s overlooked small caps may offer the highest upside potential.
Smaller firms, which tend to generate a higher share of their revenue domestically, may have an edge if there is further international trade disruption or increased fiscal spending. We explore this potential in our recent whitepaper.
Click here to read our recent whitepaper on Global ex US opportunities
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