Continued US large-cap dominance or inflection point?
The global equities outlook for 2025 revolves around a single critical question: can the dominance of US technology giants continue, or are markets approaching an inflection point?
US economic strength
US equities remain the driving force behind global market performance, supported by robust consumer spending, continued jobs growth and diminishing interest rate risk. The start of a second Trump presidency alongside Republican control of Congress promises further support for business through deregulation and tax cuts. Meanwhile, inflation has steadily declined from peaks above 8% towards the Federal Reserve’s target of an average of 2%.
A rate cut in September 2024 – the first rate cut in more than a year – kickstarted a process of lowering rates which is expected to stretch into 2025. This supports the consensus view that the world’s most important economy is not heading into a recession.
This combination of political and economic factors continues to boost sentiment towards US equities, which now account for an unprecedented 75%1 of the MSCI World ex-Australia Index, the most common benchmark for global equity returns for Australian investors.
However, this dominance carries risks for investors.
US market dominance
Over the past five years, the US market weight within the benchmark2 has risen from 65% to 75% – the highest weighting a single country has ever provided.
Within that weighting, US market performance has become increasingly concentrated in a handful of technology giants also known as the Magnificent Seven (MAG7) – Apple, NVIDIA, Microsoft, Alphabet, Amazon, Meta, and Tesla. Collectively, they represent 24% of the benchmark, roughly doubling their weight from five years ago. NVIDIA and Apple alone comprise 10.3% of the benchmark, meaning earnings announcements from either company can have the market holding its breath given the potential impact of any surprises.
The MAG7 have driven 39% of the benchmark’s five-year return, even though it includes over 1,300 companies, and around 85% of the benchmark return over this period came from the US.
Figure 1: Benchmark weights over the last 5 years
Chart takeaway
The evolution in the benchmark over the past five years points to high company, sector and country-specific risks within the benchmark. A risk-aware approach suggests diversifying away from the MAG7 and seeking opportunities elsewhere.
Small companies
Small companies3 typically trade at a premium to large and mid-capitalisation companies. Their potential for higher growth usually attracts this premium, and over the past ten years, small companies have traded on average at an 8% higher valuation than the benchmark.4
However, as of late 2024, small companies were trading at a 13% discount.
This discount emerged in late 2021 amid rising interest rates and recession fears. As rate-cut expectations continue and US economic conditions remain favourable, this discount offers an attractive entry point, particularly for US small caps where the discount is concentrated.
Developed markets outside the US
Valuations in developed markets outside the US5 are also at historically low levels relative to the benchmark. The extended dispersion between US and non-US developed market valuations creates opportunities for bottom-up stock pickers to identify companies with strong fundamentals that may have been overlooked due to broader geographic sentiment. Extra due diligence and patience may be required to search for superior return opportunities outside the US.
Figure 2: Valuation levels relative to benchmark
Source: Factset
Chart takeaway
Valuation levels point to potential opportunities outside the US and the MAG7.
Emerging Markets
Emerging Markets6, including China, are also trading at historically low valuations relative to the benchmark7, presenting further diversification opportunities. China remains the largest component of the Emerging Markets Index with a 28% weighting. Investor caution has driven Chinese equities to trade at a 47% discount to the benchmark, lower than the 10-year average of a 35% discount8
While sentiment remains negative, unexpected developments such as additional Chinese government stimulus or lower-than-expected additional US tariffs could unlock significant upside in 2025.
Global Equities bottom line
We see global equities as the best asset class for capturing new ideas and technologies entering the global economy. And these opportunities can arise anywhere, not just in the US. An allocation to global equities has the potential to provide an opportunity to participate in the positive momentum driven by stocks listed in the US, but it also makes sense to be positioned to capture opportunities beyond just the MAG7.
- All quoted as at December 2024, unless specified otherwise
- Benchmark is defined as the “MSCI World ex-Australia Index”
- Small companies: MSCI World ex AU Small Cap Index
- Valuation levels measured as the percentage difference in forward price to earnings (“P/E”) ratios (source: FactSet, MSCI and Macquarie)
- Developed markets ex-US: MSCI EAFE Index
- Emerging markets: MSCI Emerging Markets Index
- Benchmark is defined as the “MSCI World ex-Australia Index”
- Source: Macquarie analysis, Factset
Luis Sarmiento
Senior Investment Specialist
Jason Koo
Senior Vice President – Global Solutions
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