Chasing gains or hedging risks? The tug-of-war of global investors in the US stock market!

According to Zhitong Finance APP, many large investors are 迎接 2025 年的到来 with a sense of tension. So far, the global economy has avoided a hard landing, and the US stock market is expected to rise by 20% or more for the second consecutive year. For fund managers, the impending return of President Trump to the White House and persistent inflation concerns give them reason to feel anxious, but the biggest risk may lie in their reliance on the US stock market.

The leading returns globally for two consecutive years have further expanded the influence of the US stock market. The US currently accounts for 67% of the MSCI global index, compared to about 50% a decade ago. This index is a broad benchmark that tracks 2,650 listed companies in developed and emerging markets, with a total market capitalization of approximately $80 trillion. In contrast, Japan, ranked second, accounts for less than 5% of the index.

This trend is also self-reinforcing. As the US stock market outperforms other markets, the weight of US stocks in global benchmark indices naturally rises, effectively forcing passive index-tracking investors to allocate more funds to the US stock market.

However, for many large investors, the allure of the US stock market also puts them in a dilemma. Professional fund managers generally prefer diversification, spreading their portfolios across different regions and asset classes, which can reduce sudden risk losses and generate more sustainable long-term returns. A head of a large pension fund recently stated, "We are actively avoiding excessive exposure to the US." But he also admitted that this is painful.

Currently, almost no one expects the momentum of the US stock market to slow down anytime soon. Most strategists at major investment banks expect the S&P 500 index to close between 6,500 and 7,000 points by the end of 2025, indicating an increase of 7% to 15%. Bank of America analysts expect US corporate earnings to grow by 13% in 2025, driven by falling interest rates, up from 10% this year. UBS analysts point out that when the Federal Reserve cuts interest rates outside of a recession—like now—the US stock market averages an 18% increase in the following 12 months.

The historical rationale for the "exceptionalism" of the US stock market is also well-founded. Over the past decade, the S&P 500 index has had a compound annual return of 13%, while the compound annual returns of Japanese, European, and emerging market stocks during the same period were only 6.1%, 5.3%, and 3.4%, respectively. This is not a phenomenon that has only emerged in recent years. Scholars Elroy Dimson, Paul Marsh, and Mike Staunton found through research of data since 1900 that the average real return of the US stock market, in dollar terms, is 6.6%, while the average real return of international stocks is 4.5% Therefore, only brave investors will resist this trend, especially given that large American technology companies have already established an early lead in the field of artificial intelligence. For such investors, there are several reasons to be cautious about the U.S. stock market.

First is the concentration of the U.S. stock market. The largest companies in the U.S. now hold an unusually dominant position. The top ten constituents of the S&P 500 index account for 35% of the total market capitalization of the index, the highest proportion since the 1970s.

This high concentration is also reflected in global benchmark indices. For example, Apple (AAPL.US) has a weight of 4.5% in the MSCI global index, which is almost equal to the total weight of all Japanese stocks in that index. The "Seven Giants" of U.S. stocks—Apple, NVIDIA (NVDA.US), Microsoft (MSFT.US), Amazon (AMZN.US), Meta (META.US), Tesla (TSLA.US), and Alphabet (GOOGL.US)—have a total market capitalization of $16 trillion, accounting for more than one-fifth of the total market capitalization of the index.

Second, U.S. stocks are quite expensive by almost any standard. For instance, using the cyclically adjusted price-to-earnings ratio developed by economist Robert Shiller, the P/E ratio of U.S. stocks is nearly higher than any period outside of the late 1990s internet boom. Compared to stocks in other markets, U.S. stocks are also more expensive. The P/E ratio of the S&P Global (excluding the U.S.) index, which tracks large and mid-sized companies internationally, is about 18 times, while the P/E ratio of the S&P 500 index is 28 times. This disparity is not only evident in the technology sector; the stock prices of large U.S. banks and industrial companies are also higher than their counterparts in other countries.

These are all reasons for investors to believe that further returns from the U.S. stock market may be limited. Deutsche Bank strategist Henry Allen points out that the S&P 500 index has only once had three consecutive years of gains exceeding 20%, which was in the late 1990s. Goldman Sachs analysts are more pessimistic, predicting that the nominal annualized return of the S&P 500 index over the next decade will be only 3%, barely keeping pace with inflation.

A period of monotonous returns does not necessarily mean the end of the U.S. stock market's outstanding performance; U.S. laws and regulations continue to provide a favorable environment for stock investors. Trump also viewed good stock market returns as a measure of political success. However, the scale and influence of the U.S. stock market mean that investors around the world are more susceptible than ever to the fluctuations of this largest global stock market. For investors, the biggest risk in 2025 lies in the obvious places