📈  Chart of the Week 7/13/2025

By Michael Allison, CFA

Foreign Flows and the Outperformance of U.S. Equities

Since the pandemic low in early 2020, U.S. equity markets have had one of the most remarkable rallies in history. While much of the attention has gone to Big Tech, AI, and the sheer dominance of the “Magnificent Seven,” there’s been another, less-discussed driver at work: a tidal wave of foreign capital pouring into U.S. stocks.

This week’s Chart shows that cumulative foreign inflows into U.S. equities have surged by over $1.6 trillion since 2020—an unprecedented rise after more than a decade of relatively flat positioning. The steepness of this curve speaks to a global investor base seeking refuge in what it perceived to be the most resilient and innovative equity market during a time of macroeconomic chaos. Strong dollar dynamics, relative earnings growth, and America’s deep, liquid capital markets only enhanced that narrative.

But here in 2025, the tide could very well be shifting.

Year-to-date, non-U.S. equity markets, particularly in Europe and select emerging markets, have meaningfully outperformed the U.S. market. While there are many drivers behind this outperformance (including more attractive valuations and the rotation into global cyclicals), part of the explanation may lie in a simple rebalancing: foreign investors are no longer allocating fresh capital into U.S. stocks at the same breakneck pace. In fact, some may be reversing course and reallocating to under-owned international names.

If even a portion of the $1.6 trillion in cumulative foreign inflows were to be repatriated or reallocated, U.S. equity markets could face a meaningful headwind. Consider that net inflows have accounted for a significant portion of the marginal bid driving valuations—particularly in large-cap growth stocks. A return to pre-pandemic foreign positioning would not only reduce demand but could potentially spark valuation compression, particularly if domestic flows can’t fully backfill the gap.

The bottom line: while U.S. equity leadership has been durable over the last half decade, it’s also been liquidity-driven. And that liquidity has increasingly been global.

Investors would be wise to watch the direction of cross-border flows—because just as they can push markets higher, they can just as easily go the other way.

Sources: Natixis (via Bloomberg), J.P. Morgan

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