Will hegemony of US equities continue?
Donald Trump says the US has financed Europe for too long but with many portfolios skewed towards North American equities, the reverse might also be true. Can this continue? (Reuters/Jonathan Ernst)
When Donald Trump began his second term as US president earlier this year, one of his chief gripes with Europe was that the US had financed the continent for too long. No more, he vowed.
He may have had a point (notoriously not all Nato members meet the requirement of spending 2 per cent of GDP on defence).
But that doesn’t mean the reverse cannot also be true. Particularly when you look at what – and who – is propping up the US stock market.
US assets have dominated investor portfolios for longer than anyone cares to remember. In August, American stocks comprised more than 70 per cent of the MSCI World index in market cap value, while around half of global equity and bond markets consisted of US assets.
The UK’s Investment Association calculates the average global equity fund to have a US exposure of nearly 60 per cent.
For some, US productivity growth seems destined to continually outpace its advanced economy peers.
According to Chris Arcari, head of capital markets at Hymans Robertson, “consistently higher levels of investment and R&D spend” look set to support US exceptionalism for some time.
Indeed, the depth and dynamism of the US market has made it the largest recipient of foreign direct investment in the world. And who, we hear you ask, invests the most? According to the Bureau of Economic Analysis, Europe comes out on top.
The old continent invested around $3.6tn in the US in 2024. For context, this is about $300bn less than the size of the UK’s economy.
In other words, things aren’t as simple as Trump makes them sound – a development which will shock many of our readers.
They are also about to get more complicated. It looks like Europe, faced with tariff uncertainty, huge US government debt and the prospect of Trump conducting a hostile takeover of the Federal Reserve, is starting to pivot away from US stocks.
An increasingly unattractive US market
The Financial Times, AOX’s sister title, reported last month that investors were allocating huge amounts of capital to global equity funds which exclude the US. This, in part, is because many now view equity valuations in the US with a healthy amount of scepticism.
Paul Allison, portfolio manager at the $72bn Border to Coast Pensions Partnership, said: “The fate of the US stock market, and economic growth for that matter, has become overly reliant on a continuation of immense capital spending to build out artificial intelligence infrastructure.
“On top of this, policy making as it stands adds a large dose of uncertainty into the mix and taken together we think stretched US equity valuations look unsustainable.
“By contrast, Europe is set to benefit from corporate America’s profligacy as AI infiltrates every firms’ operations, boosting productivity and profit growth.”
Furthermore, the dominance of US stocks on the MSCI World index and the MSCI All Country World index means that, according to Dutch asset manager Robeco, increasing allocations to European equities would make sense for those looking to diversify their portfolios.
The journey home
European investors cannot, however, sit on their hands and wait for the house of cards to come tumbling down.
According to Allison, if Europe is to compete it must imitate America’s entrepreneurialism and encourage measured risk taking amongst its investors.
“This is partly cultural, which is hard to change, but policy making (deregulation, incentivising investment and calculated risk taking for example) can make a difference,” added Allison.
This may already be happening. Pitchbook data saw a marked uptick in European private equity dealmaking in Q3 of 2025, after the start of the war in Ukraine curtailed activity in 2022.
As we know, private equity thrives in low interest rate environments, with these currently being lower in central Europe than they are in the US.
Even still, Europe faces significant challenges after its growth and productivity stagnated in recent decades. Hymans Robertson’s Arcari listed Europe’s “structural inefficiencies” as its fragmented capital markets, high energy costs, regulatory burdens and weak innovation ecosystem.
“The quickest summary would be to say that the solution is then more integrated capital markets, addressing energy policy, regulatory reform and more incentives and investment in science, technology, engineering, and mathematics,” he said.
“This is essentially a negative mirror image of all the things that make the US such a successful economy.”
Encouraging UK investment
In some ways, the UK has already begun trying to do this. As AOX has covered, the British government is very keen for asset owners to invest in UK private assets – to the extent that it is giving itself powers to force pension funds to do so.
This is aimed at reversing a trend which goes back some decades, as we covered last week.
And it seems like some of those investors are responding.
Aviva Investors, with $313bn assets under management, has been making early-stage venture capital investments in UK-based deep tech companies since the beginning of the year, with allocations to Cambridge Innovation Capital and Oxford Science Enterprises announced in Q1 2025.
Likewise, the $33bn British Business Bank has made clear its “critical” role in delivering the UK government’s modern industrial strategy.
In June 2025, it announced a new £4bn initiative, in which it will invest across eight sectors: advanced manufacturing, clean energy industries, creative industries, defence, digital and technologies, financial services, life sciences, and professional and business services.
That being said, unilateral investment innovation by one country is not enough. As Arcari highlights, there needs to be “pan-EU coordination” on industrial policy and the capital markets union, as well as regulatory framework reform, if Europe is to meet the demand for investment outside an increasingly unreliable superpower.
Will a continent which has a long history of failing to get along suddenly see the light and grasp this opportunity? Let’s see…