Source: AFP.
The concentration question
In Reconstructing global equities: Strategic allocation in a new world, we argued that market-cap benchmarks are not neutral structures. They embed specific exposures – to the US, to growth as a style, to technology as a sector, and to the USD as a currency – that reflect the momentum of the past cycle rather than the shape of the next one. A regionally structured allocation, by contrast, offers investors a way to align equity exposure with the dispersion of global growth, valuation, and policy regimes already underway.
This companion piece examines the most dominant of those exposures: US equities. With a weight touching an all-time high of 65% in global indices earlier in the year (see Exhibit 1), US equities anchor most discretionary portfolios. That weight reflects not only past outperformance, but a set of forward assumptions – around resilience, innovation, capital flows and policy credibility – that may be harder to justify in today’s global regime.
Valuations alone make the case for scrutiny: US equities trade at a meaningfully higher price-to-earnings ratios compared to their peers in Europe, Japan or Asia ex-Japan, even adjusting for sector composition (see Exhibit 2). Relative to global averages, the US market continues to command a so-called “valuation premium” across multiple segments. This premium has often been interpreted as a reflection of structural advantages: stronger institutions, a more innovative corporate sector, and a history of more reliable earnings delivery.
However, such advantages must eventually express themselves in returns. Valuations, in other words, are not neutral: they are forward-looking forecasts. A higher price-to-earnings (P/E) ratio implies stronger expected earnings growth, or a lower perceived risk premium, or both. For example, if US equities trade at a 50% premium to peers, this difference must be justified by superior future cash flows or a lower discount rate. If those assumptions fail to materialise, the risk of valuation compression, resulting in underperformance, rises.
Exhibit 1: Share of US in MSCI ACWI
Source: Bloomberg, MSCI, Bank of Singapore, data as of 29 Jul 2025.
The following sections assess the basis for assumptions underlying the US valuation premium. First, we examine whether the underlying drivers of this premia are robust. Second, we decompose the sources of US equity outperformance over the past 10 to 15 years as well as over longer horizons to evaluate whether those drivers are repeatable or largely regime-dependent. And finally, we consider the conditions required to sustain US leadership at current valuations – and whether those conditions remain in place.
Exhibit 2: 12-month forward P/E ratios
Note: Chart shows the forward P/E ratios of major equity indices based on current prices and blended forward 12-month consensus earnings estimates, vs their respective 10-year historical highs and lows, as well as levels corresponding to one standard deviation above and below their 10-year historical averages.
Source: Bloomberg, MSCI, Bank of Singapore, data as of 29 Jul 2025.
The conclusion is not that US equities should be avoided. It is that their continued dominance in global portfolios relies on a combination of factors – elevated margins, persistent valuation premia, favourable policy conditions, and ongoing global preference for US risk assets – that appear increasingly difficult to sustain. A more balanced equity allocation, regionally and structurally, may now be better aligned with long-term investment goals.
Questioning assumed advantages
Valuation premia are rarely durable without clear economic foundations. If US equities are to justify structurally higher valuations, the underlying advantages must be both significant and persistent. This section examines the common assumptions behind US equity leadership, and considers whether they continue to warrant the premium currently embedded in market prices.
The US is, by many measures, one of the most structurally advantaged equity markets in the world. It combines deep equity capital markets which attract foreign investments (see Exhibit 3).
It combines strong legal protections for investors, and a regulatory environment that supports corporate growth (see Exhibit 4).
Exhibit 3: Gross portfolio equity and investment fund shares liabilities/GDP (2020, in %; top 20 high income countries)
Note: Ratio of gross portfolio equity and investment fund shares liabilities to GDP. Equity liabilities include shares, stocks, participation, and similar documents (such as American depository receipts) that usually denote ownership of equity. Interpretation is that High equity liabilities = attractive destination for foreign equity capital.
Source: World Bank Global Financial Development database.
Exhibit 4: Top 5 countries based on key governance indicators and US rank
Source: World Bank Worldwide Governance Indicators. Sample = 213 countries
US companies operate in a large, competitive domestic market, with access to global demand and vast financial resources beyond equity capital markets (see Exhibit 5).
Exhibit 5: Domestic credit to private sector GDP (2020, in %; top 20 high income countries)
Note: Domestic credit to private sector refers to financial resources provided to the private sector, such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises.
Source: World Bank Global Financial Development database.
These conditions have supported US leadership of firms in sectors such as technology, healthcare, and consumer services. US companies tend to reinvest more of their free cash flow than their peers elsewhere and have historically earned higher returns on that investment. While these patterns are not uniform across all sectors or firms, they have persisted through different market cycles.
The strength of the US corporate sector is widely acknowledged, but what is less often examined is the extent to which these strengths are already reflected in equity prices. US equities trade at significantly higher valuation multiples than those of other developed markets, resulting in a valuation gap which is not fully explained by differences in profitability or sector composition. The market appears to assign a structural premium to US equities, based on perceptions of inherently higher quality, but also on the assumption that this translates into the persistence of superior performance.
The assumption that US equities deserve structurally higher valuations often draws on their historical return profile, which we turn to in the following section. Though US outperformance is apparent, long-term data casts doubt on its persistence. An analysis of the performance of global equity markets from 1900 to 2020 finds that the US has delivered strong returns, but not by an extraordinary or consistent margin. Outperformance has tended to come in cycles, often concentrated in specific decades.
Further, much of the US market’s current dominance in global indices reflects the compounding of recent success, not an uninterrupted record of leadership. If valuation premiums are justified by historical performance, they must be grounded in a broader, more secular context – not in the extrapolation of a single, unusually favourable period.
And lastly, recent outperformance has been driven by a narrow group of US firms, mainly in technology and platform-based sectors. Yet current valuations imply that a broader set of companies will sustain similar outcomes. This is not a forecast being debated; it is a set of growth assumptions already embedded into market prices. Whether it proves accurate will depend on the continuation of conditions that have been unusually favourable – and may not persist.
While these institutional and macro advantages are widely cited to justify a structural premium, it’s important to ask whether historical returns often used as supporting evidence truly reflect persistent superiority, or something more cyclical or regime-bound.
What drove US outperformance
US equities have delivered strong returns over the past 15 years. From the 2008 global financial crisis (GFC) through 2024, the S&P 500 Index outperformed developed market peers by a wide margin, both in absolute terms and on a risk-adjusted basis. This performance is often attributed to superior fundamentals – stronger earnings growth, better capital allocation, and operational excellence. But return decomposition tells a slightly different story.
Nearly 80 percent of US outperformance relative to non-US equities came not from fundamental return, but from valuation expansion and USD strength. This has important implications: if valuation re-rating and currency gains were the dominant drivers, then the risk is that future returns may mean-revert, particularly if macro conditions or investor sentiment changes.
This raises fundamental questions about the durability of US market leadership. The US grew from around 15 percent of global equity market-capitalisation in 1900 to over 50 percent at the end of their study in 2021. Much of this growth reflects the compounding of past success, rather than an immutable structural advantage. Historical return data is unavoidably shaped by survivorship bias: countries whose markets underperformed often disappeared, stagnated, or became “uninvestable”, while the US remained both accessible and dominant. As a result, global indices today overweight winners and systematically underrepresent markets that failed. Outperformance is easier to claim when lagging markets drop out of indices. But from a forward-looking standpoint, the bar for continued leadership only gets higher.
Equity outperformance has historically shifted across countries and decades: often this is in response to changes in macro conditions, policy regimes, or investor sentiment. Even dominant markets experience reversal. For investors, the risk is not that the US lacks genuine strengths. It is that performance patterns driven by valuation re-rating, currency strength, and concentrated earnings contributions are treated as structural and permanent, when in fact they are historically episodic.
Understanding the composition of past returns helps clarify what is likely to persist – and what may not. It draws a necessary distinction between realised returns and repeatable drivers, and underscores the need for discipline when evaluating long-run allocation decisions. The US has led, and may continue to do so. But the case for that outcome must rest on current evidence, not on an assumed continuation of an exceptional past.
What’s at risk?
The strength of US equity performance in recent years has coincided with unusually favourable conditions. Corporate margins reached record highs, the USD appreciated against global peers, real interest rates remained low, and capital was cheap and abundant. Several of these conditions now appear more uncertain, or may already be reversing.
One area of concern is corporate profitability. S&P 500 companies’ operating margins remain elevated by historical standards, but forward margin estimates have started to flatten. Some of the drivers behind margin expansion over the past decade – low wage pressure, corporate tax cuts, declining interest expense – are unlikely to be repeated. Cost structures are shifting as supply chains are reshored, investment cycles become more policy-driven, and financing becomes more expensive. The pressure on margins is cyclical in part, but also reflects structural changes in the global cost environment.
Exhibit 6: US corporate profits and corporate profits as a share of national income
Source: Federal Reserve Bank of St. Louis.
Recent analysis by the Federal Reserve Bank of St. Louis suggests that the post-pandemic surge in US corporate profits has been concentrated in a handful of domestic, non-financial industries – notably retail and wholesale trade, construction, manufacturing, and healthcare – rather than broad-based across sectors or driven by international exposure. This suggests that recent margin strength may not represent a structural reset, and may prove sensitive to cyclical or policy changes.
Valuation risk is also more pronounced. US equities continue to trade at a premium to global peers, but the path forward requires that premium to be sustained or expand further. That leaves less room for error. If earnings growth slows or investor confidence wanes, the index is more exposed to repricing risk. This is particularly relevant in sectors where future earnings are already priced aggressively. A significant portion of the US market’s valuation rests on the durability of long-duration growth assumptions.
USD strength has contributed materially to past outperformance, but may also prove less supportive. Non-USD based investors benefit from exposure to USD via US equities, but not when the USD turns.
The US continues to run large and widening fiscal deficits, and real interest rate differentials have narrowed. While the USD remains central to global portfolios, signs of diversification are growing. The currency contribution to equity returns could reverse, with implications for both performance and risk management.
Political risk extends beyond currency. Adam Posen, writing in Foreign Affairs, argues that the US has shifted from global economic stabiliser to something closer to an “economic predator”. He describes a growing perception that US policy is no longer rules-based, but increasingly transactional and domestically driven. In his view, close allies are responding by self-insuring – building buffers that reduce their reliance on US policy and US assets. This weakens the traditional safe-haven status of US markets and raises the cost of capital over time. If institutional predictability was part of the rationale for a structural valuation premium, that premise may now be under question.
What’s overstated?
In parallel, several of the standard arguments used to justify continued US equity dominance deserve closer examination, not because they lack merit, but because they may already be reflected in market prices.
Capital market depth is an often-cited advantage. US markets are broad, liquid, and institutionally supported. But other markets – including Europe and Asia – have made significant strides in transparency, governance, and accessibility. The premium assigned to US capital markets reflects a legacy of trust, not a monopoly on functionality.
Innovation, measured through R&D spending and intellectual property output, continues to favour the US, but its correlation with equity returns is more modest than often assumed. Recent research highlights that it is not the volume of innovation alone that matters, but its intensity, quality, and the risks investors bear in holding such firms. Higher R&D intensity corresponds with greater subsequent returns, but this seems to reflect a risk premium – investors demand extra return for bearing the uncertainty and volatility associated with R&D-led growth – not mispricing. Overall, innovation remains a structural advantage, but its translation into equity outperformance depends on how effectively firms deploy it and whether investors are compensated for associated risks.
Finally, corporate governance and institutional quality – once clear differentiators – are less obviously advantageous. US equities continue to benefit from shareholder alignment, but regulatory volatility and political interference have become more visible risks. On broader institutional metrics such as rule of law, government effectiveness, and regulatory quality, the US ranks (far) behind several advanced economies as measured by the World Bank (see Exhibit 4).
Implications for portfolios
All told, these do not invalidate the case for continued US equity outperformance, but they weaken the case for assuming its permanence. Market-cap weighting, by construction, extrapolates from the recent past. Strategic allocation requires a different mindset: one that evaluates whether the conditions that enabled past outperformance are likely to persist, and whether current prices already embed optimistic assumptions about those conditions.
A regionally structured equity allocation – such as the one embedded in Bank of Singapore’s Strategic Asset Allocation – offers a more forward-looking approach. It diversifies exposure across economic models, policy regimes, valuation anchors, and currencies. It also avoids overreliance on a narrow set of drivers like valuation expansion or dollar strength, which historical decompositions suggest are episodic, not structural.
Robust optimisation further strengthens this approach by constructing allocations that are resilient across multiple scenarios – not just those that favour US dominance. In an environment of shifting macro regimes and fading tailwinds, we think such an allocation framework is better aligned with long-term investor goals.
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