US Equity Market Warnings – And What We Can Do About It

There is more and more commentators shouting from the roof-tops about potential Market Warnings, particularly US Equity Market warnings. Some suggest that the massive growth of North American stock values and earnings over the past few years (since Covid really), points to a sharp correction/decline in the coming years. Yes, they are predicting a decline – and we know how predictions work out in this world!

Specifically, the main claims/alarms being flagged by some are;

- US Tech stocks have gone so incredibly well for several years, these companies, and the US is now over-priced and make up larger proportions of Globally Market than they ‘should’.

- The future expected returns from S&P500 as a whole is grim, so people ‘should’ now re-allocate to Europe, Emerging Markets and other locations, for future returns

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Well-diversified investors might not need to worry too much about any of this. Less-well-diversified investors might. Only time will actually tell. I’ll explore what is and isn’t really happening, and what one’s practical options are.

First thing I will say is that nobody knows if Europe, US or some other area of the rest of the world will perform best or worst this year, next year or any series of years into the future. While the figures might point to a potential outcome, the actual future outcome is unknowable, by anyone.

Second thing I will say is that I don’t know if Europe, US or some other area of the rest of the world will perform best or worst – and why I always suggest, from Day 1 of an investment, that we are as well diversified as we can be while maintaining a position that will enable growth when and where growth will occur, wherever in the world that may be.

Having said that, let’s take a look at what is being said – so at least we understand why some are flagging possible issues.

There are 3 things I have observed which make me think there may be a shift in how well people diversify their investments globally (as I believe they should).

#1 US Tech and S&P500 have gone gang-busters….

There is nobody pays any attention to markets that won’t acknowledge that US has done incredibly well versus the rest of the world. But how much better? Allow me to illustrate!

The S&P500 denoted by a Vanguard Euro Accumulating UCITS here has increased in value by 86% in the past 4 years, Feb 2021 to Feb 2025.

The rest of the world, denoted by an iShares MSCI ex US ETF (Euro) has increased in value ‘only’ 27% in the past 4 years.

S&P500 has delivered almost 60% more return in that 4 years than the rest of the world.

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So that settles that; S&P500 has gone incredibly well compared to the rest of the world in recent years. No question!

And this growth of the US market appears to have been driven by a relatively small group of stocks. These are mostly the giant technology companies; Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, commonly referred to as the ‘Magnificent 7’.

Their outperformance has been so large that the market is concentrated at a level not seen for a century according to Goldman Sachs Asset Management 2025 Outlook

Is that a bad thing? Not necessarily. And not if it is justified.

#2 A Well-Recognised Economist..

Callum Thomas from TopDownCharts is an interesting writer/economist, and here are his reasons why he sees Europe in a Bull Market going forward….

• Valuations: unlike expensive US stocks, Thomas suggests European stocks are still cheap/reasonably priced, and trade at a record low valuation discount vs US..

• Monetary Policy: Thomas states that the European Central Bank began rate cuts earlier (June 2024) than the Fed, and cut by a larger amount (from 4.5% to 2.9%); a tailwind for the economy and markets.

• Geopolitics: He believes the Russia/Ukraine conflict is going to be put on hold soon, which will remove war related costs, decrease uncertainty, and maybe even help Europe’s economy through rebuilding.

• Politics: Germany is looking likely to see a shift in government from left to right in its upcoming elections which will likely see a more growth/business-friendly regime. He reckons this will be good for the rest of Europe as its largest economy accelerates.

• China: He suggests that China’s economy is starting to turn up from recession and prolonged property market downturn, and that this will be a boost for Europe’s luxury goods companies, and wider export demand.

• He states that most of these points are medium/longer-term, and that it looks like the rally and breakout in European equities is a sign of more things to come.

#3 A LinkedIn Post...

Ross Cohen is a Financial Planner with Ritholtz Wealth Management (the celebrity super-stars of FP in North America, guided by Josh Brown & Co.) Ross is a great guy, and shared a post which highlighted how in-vogue Europe and the rest of world (outside US) is so far in 2025! Many American investors and advisors have been big fans of investing mostly in US Stocks. This is understandable, given they have often out-performed the rest of the world ((see our Blog here-  Should I Go All-In On The S&P500 ).

But the tide appears to be turning. The US Financial Planning world is not only noticing us, but encouraging US investors to look diversify across Europe and the ROW (Rest of the World!), and that we are a source of potential returns! Read Ross’s post below, and my comment, and his reply!

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Ross is a good guy, shares good ideas, follow him here!

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Now to the second half of the first warning, that the S&P500 is over-priced and makes up a larger proportion of any Globally Diversified Fund than it should.

In 2024, more than half the S&P 500’s 25% total return came from the ‘Magnificent 7’.

Nvidia alone, with its 171.2% return, produced more than one-fifth of the entire market’s gain in 2024.

- If you are invested in the S&P 500, c20% of your money is in three holdings (Apple, NVIDIA and Microsoft)

- The same three stocks account for 13% of the MSCI World index.

- The top ten holdings in both indices stands at 36% S&P and 25% MSCI

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But such dominance by a handful of companies isn’t unusual. Jason Zweig of the Wall Street Journal wrote recently about the fact that in 1812, the insurance/bank sector made up 70% of the entire S&P500! And we all know how well the S&P has done since then, despite financial sector now only making up c13%!

Nobody with much credibility out there is claiming that the rise of the ‘Magnificent 7’ is a rerun of what happened at the turn of the millennium, when the technology sector drove stock markets upwards, only to be followed by a cataclysmic (what a lovely yet awful word!) collapse.

The companies in question today, are immensely mostly profitable with incredible competitive advantages/monopolies! Their successes and strengths are well recognised at their current valuations.

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And it is easy to forget about earnings, which makes up a large part of the Price/Earnings Ratio on which these ‘over-valuations’ are being made.

- The S&P500 earnings in January 2021 (when P/E was 35) were $105.

- The S&P500 earnings in January 2025 (when P/E was 28) were $212.

In summary, the actual earnings/income from the S&P doubled in those 4 years – it wasn’t a stock market rally purely based on euphoria and expectations, the companies generated massively, and increased that generation two-fold in 4 years!

Looking at it more granularly with a specific company; Nvidia, which has been the celeb stock of the past year or two. Nvidia share price sky-rocketed in recent years, but so did its earnings. It hasn’t all of a sudden risen to a silly price versus it’s earnings….

- 2 years ago Nvidia was c$20 per share

- 2 years ago it’s earning was c$0.20 per share

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From Feb 2023 to February 2025 it’s price has sky-rocketed from $20 to c$138 (7x) but it’s earnings have exploded even more, from $0.20 to c$2.50 per share (12x).

Going by P/E ratios, it is almost twice as good value as it was 2 years ago! But you won’t hear many saying as much (even though it is!?).

Back to the S&P as a whole, the S&P500 now makes up c70% of the Global Market – because of the growth of it’s companies. Is that too high? Well it is what it is.

If you are invested solely in a single Developed Global Market Fund for example, you have c70% exposure to the S&P. If that is you, should you be nervous? Is the future looking terrible? Should you take action?

Lets explore…..

What about the second claim, that future returns from S&P500 are going to be terrible – and that one should move investment allocation from US to Europe and Rest of World??

The below from J.P Morgan (again!) paints an interesting picture, and leads to many making that claim about the relative value to be had in S&P500 versus the other major areas of the world.

The data and positioning suggests that a Global Index (which is now made up of c70% S&P500) is expensive, that US is really expensive, that Europe is decent value, that UK is cheap, Emerging Markets are cheap and China is really cheap!

It is these metrics that have people shouting/selling from the roof-tops to move your money here, there and everywhere, to ‘avoid Armageddon’ on one side, and to ‘capture upside’ on the other!

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This is based on ‘Forward Price Earnings’ Ratios, which are a different beast to ‘Price Earnings Ratios’!

Forward P/E Ratio – Tell Us Anything?

Forward P/E is a stock or overall market valuation metric that compares a company or markets price to its projected future earnings.

The calculation, as you’ll have gathered already is:

Forward P/E= Current Share Price / Estimated Future Earnings per Share

The current Forward P/E of the S&P 500, to stick to the US analysis right now, is c22.

For context, in Jan 2022 the S&P500 Forward PE ratio was the same, 22.

And since then how has the market performed?

Total returns since +58%!

Forward PE is not a perfectly reliable gauge on which to make long term or indeed medium term decisions – if it was, we’d all be multimillionaires!

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Whether the US market is over-valued and heading for correction is a matter of opinion and speculation, but the evidence in terms of valuations relative to the past suggests that it is in expensive territory.

If the growth in the US market is simply a reflection of a vibrant economy and more profitable companies, that shouldn’t be a concern, given the US market has always looked more expensive than other markets, yet has continued to deliver.

But then someone might retort with more JP Morgan charts like this one, which states that the 10-year subsequent returns for S&P 500 when Forward PE ratio is c22, is between zero and c4% annually, for the handful of scenarios that the stars have aligned like this.

So, IF (and it is a large ‘if’), we were potentially facing into a decade of 0-4% annual returns per year from US equity – what do you do?

Possible Options Available To Long Term Investors Who Think S&P500 Is On The Brink Of A ‘Lost Decade’

Invest in Bonds Instead?

It is (I believe) sensible to have an allocation to Bonds in most scenarios, and that is no different at times like these. Should a long term investor allocate much more heavily to Bonds because of what some are seeing in the data? If one is a long-term growth-oriented equity investor, I don’t believe so.

Allocate heavily to China/Emerging Markets?

China and Emerging markets represent a very small % of the global market cap, so if you were to allocate say 50% of your investments here, you are essentially saying you know better than the market. You are betting against the US, and betting heavily on China and/or Emerging Markets delivering (which they may or may not do).

Withdraw to cash, and phase back in ‘once S&P500 falls’??

We wrote before that when markets fall across the globe, S&P500 can fall further than rest of the world. So is this a wise strategy? I don’t believe it will serve too many of us too well. The issue around when to get out of equity, when to get back into equity and the psychological nightmare and mistakes that can and are made around all of this are fraught with danger and risk massively underperforming the market over the medium and long term. Plus, how long are you willing to sit in cash if a market continues to charge ahead (which the S&P500 may or may not do from here, for example)??

Reduce Allocation to US, and increase into Europe?

If you are to believe Callum Thomas from earlier, this might make sense? Again, you are actively betting against the US, and on Europe. And again, if and when Europe did continue to outperform, at what stage would you re-balance across to the US? It inadvertently turns you into an active investment manager – and we all know how successful they are as a whole at beating the markets – awful, and they are full-time professionals with teams of researchers!

Be Diversified From The Outset?

This, for what it’s worth, is my strong preference!

The type of portfolio we prefer will contain a tilt to Emerging Market, Small Cap and Bonds from the get-go – we never own enough of anything to either make a killing, nor to be killed!

The like of Zurich Prisma Max and others have had firm track records among insurance company products, and that is because they typically held concentrated holdings of Magnificent 7 and US Stocks. The Zurich Prisma Max is 75% US Equity as of end 2024. Only time will tell whether that was the right thing to do long term or not.

The type of portfolio we prefer will contain a tilt to Emerging Market, Small Cap and Bonds from the get-go. We aim to be diversified from Day 1.

We never own enough of anything to either make a killing, or to be killed!

Conclusion

The vast majority of us do not want to become active investment managers, neither on purpose or as an unintended consequence of listening too closely to predictions and siren calls. Just as we wouldn’t go all-in on US if someone said it’s P/E was cheap, we don’t run for the hills if someone said it’s P/E was expensive. Long term passive investors are long term passive investors. Because it works, over the long-term. Short term, who knows? Nobody.