Wall Street "reduces holdings in the U.S.": Over $50 billion flowed into international ETFs in January, shifting towards China, Japan, and Europe

After years of heavily investing in large U.S. tech stocks, Wall Street investors are accelerating the shift of funds to international markets. This change is driven by high valuations in the U.S. stock market, a weakening dollar, and new opportunities in overseas markets, as investors bet that the U.S. market's lead will narrow.

Data on capital flows shows that this trend is gaining momentum. According to a report by The Wall Street Journal on Monday, Morningstar Direct data indicates that in January, investors saw a net inflow of $51.6 billion into international stock ETFs, with monthly inflows significantly rising since the end of 2024.

Several global indices have outperformed major U.S. benchmark indices this year, including the STOXX Europe 600 Index, the Korea Composite Index, and the MSCI Emerging Markets Index. Last year, the MSCI All Country World Index ex USA surged 29% in U.S. dollar terms, marking its best performance in over a decade, far exceeding the S&P 500's 16% increase.

This round of capital outflow differs from last spring's "reduce U.S. exposure" trade. Most asset managers still believe that the U.S. will lead the global stock market rally, but the extent of that lead may not be as significant as in recent years.

Valuation and Dollar Driving Capital Outflow

High valuations and dollar depreciation have become the core factors driving capital flows overseas. The dollar has fallen about 10% from its peak in 2022, enhancing the return potential of foreign stocks by increasing the relative earnings value of foreign companies compared to U.S. companies.

Keith Lerner, Chief Investment Officer at Truist Advisory Services, stated, "We are now in a global bull market; it's no longer just a U.S. story."

Alex Guiliano, Chief Investment Officer at Resonate Wealth Partners in New Jersey, has increased allocations to European and Japanese stocks this year, partly attracted by lower valuations. "It feels like we have reached a turning point," he said, "the international markets seem to have many winning ways."

Michael Rosen, Chief Investment Officer at Angeles Investments, has concentrated his portfolio on the largest U.S. tech stocks for most of the past decade, but over the past year he has shifted funds toward global small-cap and value stocks, focusing on Europe and China. "For us, this is a very significant shift," Rosen said.

Catalysts Emerge in Overseas Markets

Investor optimism has been boosted by several developments overseas, from fiscal stimulus in Japan to a surge in military spending in Europe. On Monday, Japan's Nikkei 225 Index hit a new high after Prime Minister Fumio Kishida's victory in the temporary parliamentary elections.

Some traders are simply looking for better trading opportunities than the high-priced domestic stocks. Others hope to diversify away from the domestically dominated major indices led by a few tech giants.

Don Calcagni, Chief Investment Officer at Mercer Advisors, stated that while he still believes the U.S. is "exceptional," he has concerns about the future of the U.S. market, including the ever-expanding national debt and the political and economic volatility brought by President Trump "There is some strong evidence suggesting - not necessarily a reduction in U.S. holdings - but rather a rebalancing of allocations outside the U.S., adopting a more balanced approach," he said.

Difference from the "Reducing U.S. Holdings" Trade

Asset managers quickly reminded that the recent wave of foreign stock purchases is not a second part of last spring's "reducing U.S. holdings" trade. At that time, global investors sold off U.S. stocks, government bonds, and other dollar-denominated assets, with the dollar plummeting during tariff turmoil.

Calcagni cited the double-digit annual gain of the S&P 500 index last year, saying: "If the reducing U.S. holdings trade could give me a 16% return, I would keep doing it. We still think the U.S. is outstanding."

Despite the recent downturn in tech stocks impacting the market, the U.S. stock market still reached new highs last week, with the Dow Jones Industrial Average surpassing the 50,000-point mark for the first time.

Investors have also been rotating among domestic stock market leaders for some time. After the U.S. stock market achieved astonishing returns for three consecutive years - primarily driven by the AI investment boom - traders began looking elsewhere for the next wave of gains. Foreign stocks are not the only beneficiaries: small-cap stocks and blue-chip stocks have also outperformed major benchmark indices in recent weeks.

Calcagni stated that investors' focus on the U.S. market is expanding. "Many of our clients are now asking us why they don't hold more foreign company stocks," he said, "investors may have found a new faith in international diversification."