The Regional Rebalance: Rethinking Global Equity Exposure

Over the past 15 years, the U.S. equity market has steadily increased its share of global market capitalization, driven by strong corporate profitability, an innovation-heavy economic engine, and the dominance of a few large-cap technology companies. As a result, global public equity benchmarks, like the MSCI ACWI, have become increasingly tilted toward the U.S. – a trend that has both rewarded and challenged long-term investors.

Benchmark concentration has been magnified by cap-weighting, a methodology that allocates more exposure to companies with larger market capitalizations. As U.S. equities have outperformed, they have become a larger portion of global indices, thereby commanding more capital inflows through passive vehicles. While this may seem efficient, in our view it can create feedback loops that increase portfolio risk and diminish the value of global diversification.

In this investment perspective, we review the historical rise of U.S. equity dominance, examine the implications of cap-weighted benchmarks on global diversification, and assess potential approaches for more balanced and forward-looking regional implementation.

The U.S. Dominance Story

Since the Global Financial Crisis, U.S. equities have delivered strong returns, far outpacing developed and emerging peers. This outperformance has been driven by several factors:

• High exposure to fast-growing sectors like technology and communication services.
• A resilient economic backdrop, bolstered by accommodative monetary policy.
• Structural advantages in capital markets and corporate governance.
• Sustained innovation and productivity gains, particularly among megacap firms.

These tailwinds pushed U.S. equities to comprise 64% of the MSCI ACWI as of mid-2025 – up from just over 40% in 2008. This increase reflects market performance, not necessarily forward-looking return expectations or economic fundamentals. And while investors have generally benefited from this upward trajectory, they’ve also become more exposed to sector and factor concentrations – especially momentum and growth.

The Risks of Momentum-Driven Allocation

As regions outperform, they take up a higher percentage of a global cap-weighted index weight, attracting more passive flows. This reinforces recent trends, often at the expense of valuation discipline or diversification.

For example, a cap-weighted allocation today implies a strong conviction in continued U.S. outperformance and a diminished role for non-U.S. equities – despite more attractive relative valuations in Europe, Japan, and parts of the emerging markets. While this might be justified by near-term earnings strength or geopolitical stability, it can also lead to structural underexposure if these assumptions do not play out.

This concentration also affects the factor profile of portfolios. By overweighting the U.S., investors are more exposed to high-growth, high-momentum characteristics at a time when value, cyclicals, and international small caps may offer meaningful long-term upside.

The Case for Deliberate Diversification

We believe a well-diversified global equity portfolio should balance regional exposures in a way that reflects both strategic beliefs and economic fundamentals. Relying solely on cap-weighting can obscure important differences in valuation, expected returns, and macroeconomic resilience.

In our view, regional diversification provides several benefits:

• Valuation Arbitrage: S. equities currently trade at a premium to their developed non-U.S. and EM counterparts. A reversion to the mean in valuations may favor non-U.S. markets.
• Diversified Factor Exposure: Reduces concentration in a single factor (e.g., growth/momentum) and adds exposure to value, dividend yield, and cyclicality.
• Policy Differentiation: Non-U.S. regions may pursue different fiscal, monetary, and regulatory paths, creating opportunities for relative outperformance.
• Currency Diversification: Helps hedge against U.S. dollar volatility over time, especially if the dollar weakens as rates normalize or deficits expand.

Implementation Options

No single approach fits all, but for investors weighing a move away from relying solely on the ACWI regional weights, we believe several options warrant consideration

Capped Regional Weights

Cap U.S. exposure to a predefined ceiling (e.g., 70%) to help guard against overconcentration. This helps retain a broadly market-based orientation without entirely abandoning diversification.

Static Strategic Targets

Set long-term targets for each region (e.g., 60% U.S., 25% developed non-U.S., 15% EM) and rebalance periodically. This approach can be simple to maintain and aligns well with governance-focused portfolios.

Fundamental Indexing

Weight regions by fundamentals such as revenue, book value, or cash flows – breaking the link between index weight and stock price. In our view, this anti-momentum methodology would have mitigated the growing presence of U.S. megacaps in global indices over the past decade and could increase exposure to emerging markets or underappreciated regions.

Global Economic Footprint

Allocate based on share of global GDP or purchasing power parity. This approach tends to overweight EM relative to cap-weighted indices, potentially aligning better with long-term global growth.

Return and Risk-Based Models

Use long-term capital market assumptions (LCMAs) to allocate capital where risk-adjusted return opportunities appear most favorable. This dynamic method is more responsive, but requires ongoing oversight and conviction.

Lean In/Out within Existing Asset Allocation Ranges

Most clients’ asset allocation allows 5-10% deviations within the target weighting for an asset class.  Leaning out of the U.S. exposure within the asset allocation range could be an option for clients concerned about geographic overconcentration.

Considerations for Diversification

Recent volatility, macroeconomic uncertainty, and geopolitical realignment all point to a world where past patterns may not repeat. While the U.S. market is currently the most dominant due to favorable policy, strong corporate earnings, and dominant global brands, several trends suggest this leadership may not remain unchallenged:

• Elevated consensus expectations and higher starting valuations in U.S. equities.
• Structural reforms and fiscal stimulus in Europe and Japan.
• Demographic tailwinds and rising middle-class consumption in EM.
• Shifting trade alliances and reshoring of supply chains across regions.

That said, we are mindful that despite the significance of the U.S. weight in the MSCI ACWI, the revenue weight of the U.S. in the index remained flat versus 20 years ago, as U.S. companies increased their revenue footprint abroad.

Putting It All Together

We are not advocating for a wholesale departure from cap-weighted indices. These benchmarks offer useful reference points, efficient vehicles, and limited tracking error for policy portfolios. But in today’s market environment, where concentration is high and dispersion is widening, we believe the question is not whether you need global diversification – it’s how to implement it thoughtfully.  With careful design and discipline, portfolios can be rebalanced toward a more globally representative opportunity set.

Indices referenced are unmanaged and cannot be invested in directly.  Index returns do not reflect any investment management fees or transaction expenses. Copyright MSCI 2025.  Unpublished.  All Rights Reserved.  This information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices.  This information is provided on an “as is” basis and the user of this information assumes the entire risk of any use it may make or permit to be made of this information.  Neither MSCI, any of its affiliates or any other person involved in or related to compiling, computing or creating this information makes any express or implied warranties or representations with respect to such information or the results to be obtained by the use thereof, and MSCI, its affiliates and each such other person hereby expressly disclaim all warranties (including, without limitation, all warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information.  Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any other person involved in or related to compiling, computing or creating this information have any liability for any direct, indirect, special, incidental, punitive, consequential or any other damages (including, without limitation, lost profits) even if notified of, or if it might otherwise have anticipated, the possibility of such damages. All commentary contained within is the opinion of Prime Buchholz and is intended for informational purposes only; it does not constitute an offer, nor does it invite anyone to make an offer, to buy or sell securities.  The content of this report is current as of the date indicated and is subject to change without notice.  It does not take into account the specific investment objectives, financial situations, or needs of individual or institutional investors. Information obtained from third-party sources is believed to be reliable; however, the accuracy of the data is not guaranteed and may not have been independently verified.  Performance returns are provided by third-party data sources.  Past performance is not an indication of future results. © 2025 Prime Buchholz LLC