For the first time in a decade, European equities have broken out of their constantly widening valuation discount range compared to the US. Historically, such breakouts have signaled the beginning of a long-term upward trend where the valuation gap narrows significantly.

Historically, US earnings outgrew the world by 1%. Post-GFC, this widened to 3%. Investors have extrapolated this recent, higher rate as the new normal, pushing the US CAPE ratio to nearly double that of non-US markets. This represents a historically extreme valuation based on a potentially temporary growth advantage.

In 2025, US stocks underperformed global peers despite superior earnings growth. Non-US markets saw significant price increases on flat or negative earnings, a divergence that Goldman Sachs Wealth Management believes is unsustainable, reinforcing their long-term US overweight thesis based on earnings fundamentals.

Bridgewater's Co-CIO argues the winning formula of the last 15 years—concentrating capital in US equities and illiquid assets—is now a dangerous trap. He believes most investors have abandoned diversification because it hasn't worked recently, creating a risky setup that calls for a globally diversified portfolio.

When markets are top-heavy and expensive, like in 2000, the concentration risk of market-cap weighting is severe. In the 13 years after the dot-com peak, while the S&P 500 went nowhere, its equal-weighted version doubled, highlighting a powerful de-risking strategy.

J.P. Morgan data shows that buying the S&P 500 when its P/E ratio is 23 has consistently led to 10-year annualized returns between -2% and 2%. This suggests investors should seek alternatives when the market is overheated.

Many non-US companies are growing as fast as the Magnificent 7, offer significantly higher dividend yields (7-8x), and trade at a 30-50% valuation discount. This represents a rare cost-benefit opportunity that investors, who typically apply such analysis to every other purchase, ignore in the stock market.

For the first time in a decade, European equities have broken out of their long-term trend of a widening valuation discount versus the US. Historically, such breakouts signal the beginning of a sustained, multi-year period where this valuation gap narrows significantly from its current 23%.

Market cap indexing acts like a basic trend-following system by buying more of what's rising. However, its Achilles' heel is the lack of a valuation anchor, causing investors to over-concentrate in expensive assets at market peaks. In high-valuation environments, almost any other weighting method, like equal-weight or value, is likely to outperform over the long term.