The Great Rotation: Part I

Verdad

Brian Chingono

Research

6 Pages

This research highlights the growing imbalance in U.S. equity allocations, arguing that emerging valuation risks could prompt investors to rebalance toward international markets. It suggests a shift toward regions with more attractive valuation and income fundamentals may offer better long-term return potential.

Part I explains why an unwinding of hyper-concentration in the US may favor balanced global portfolios. Then Part II shares why the United States’ outsize weighting in commercial indices appears unjustified by its share of global GDP.

Key Takeaways

U.S. dominance extreme: U.S. equities now make up about 70% of developed-market indexes, far above their ~55% share of net income generation
Valuation gap widening: U.S. CAPE is ~36x, compared to Europe (~21x) and Japan (~25x), signaling lower expected returns here
Return opportunity abroad: Typical valuation-return models suggest Europe and Japan could beat U.S. equities by ~1.5%–1.6% annually
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