• History has shown that global equity leadership changes over time.
  • We see an opportunity for diversification in non-U.S. markets to benefit investors.

The bull market that began at the end of the global financial crisis started with broad gains and little differentiation among individual securities; it eventually morphed into a market driven by a narrow concentration of the largest technology stocks. On a cap-weighted basis, Apple, Microsoft, Amazon, Google and Facebook surged over 50% for the year-to-date as of August 31, 2020. By comparison, the remaining stocks in the S&P 500 Index were about flat during the same period. And despite the broad benchmark index finishing the first eight months up near 10% for the year-to-date, the majority of stocks in the index were down over the same time.

For U.S. investors who have watched the meteoric rise of these stocks carry the broader equity indexes higher, investing anywhere but domestically has been a tough sell over the past several years. A possible question to ask might be: “Why diversify my investments outside the U.S.?” One could even reason that over the last 11 years — since the end of the global financial crisis in March 2009 — investors have been served much better by allocating their entire equity exposure to the U.S. rather than diversifying between U.S. and non-U.S. equity markets. Should abandoning non-U.S. equity investments be given any consideration?

Leaders can become laggards

It’s easy to see historical parallels when comparing the leaders of today’s U.S. equity market with the global winners from previous decades. The outperformers at any given time have often later underperformed; what looked like a sure investment in one decade turns into a losing one over the next 10 years. In fact, following the “prominent belief” in a given moment has rarely been a successful strategy over longer periods.

In the 1980s, six of the top 10 companies in the world by market capitalization were in the energy sector, which later became an asset class to avoid as reduced demand and increased production drove a glut on the world market. Years later, U.S. NASDAQ returns looked too good to be true as the tech bubble grew bigger — with many investors caught off guard when the bubble eventually burst.

It is almost inevitable that the U.S. mega-cap technology stock leadership we have seen over the past several years will eventually cede fortune to something else. Some perspective is gained by comparing the value of the tech group against greater parts of the global economy.

As of September 16, 2020, the top five U.S. companies by market capitalization — Apple, Microsoft, Amazon, Google and Facebook — were valued more as a group than the combined stock markets of Canada, South Korea, Brazil and Russia. You could also buy every company on the German, U.K. Italy, South African and Israeli exchanges for less than the combined value of these tech names. The dependency on this group to continue to drive U.S. market returns could become a greater concern if lingering scrutiny by antitrust agencies eventually threatens their dominance. 

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Index Definitions 

S&P 500 Index: The S&P 500 Index is an unmanaged, market-weighted index that consists of 500 of the largest publicly-traded U.S. companies and is considered representative of the broad U.S. stock market. 

Legal Note

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.

There are risks involved with investing, including possible loss of principal. Diversification may not protect against market risk.

Information provided by SEI Investments Management Corporation, a wholly-owned subsidiary of SEI Investments Company. Neither SEI nor its subsidiaries is affiliated with your financial advisor.