Why Global Stocks Are Leaving the U.S. Behind

Ned Davis Research: Shift Toward Japan and Emerging Markets, Away from U.S. Stocks

The U.S. market may be hitting record highs, but one top strategist says it’s time to look elsewhere. Despite a steady run for the S&P 500 — up 14.6% this year — and the Nasdaq Composite gaining 18.8%, Ned Davis Research (NDR) believes investors should start reducing U.S. exposure and reallocating to Japan and emerging markets (EM).

In a recent note, Tim Hayes, NDR’s global chief strategist, warned that signs of fading relative strength in U.S. equities suggest a period of underperformance ahead, while Japan and EM are showing strong momentum, attractive valuations, and positive capital flows.

U.S. Strength Starting to Fade

U.S. stocks make up nearly two-thirds of the MSCI All-Country World Index (ACWI), but despite their global influence, they’ve underperformed both year-to-date and over the past several weeks. In comparison, the MSCI Emerging Markets Index has surged 25% in 2025, and the MSCI Japan Index is up 4% in the last 21 days — both ahead of U.S. benchmarks.

This divergence has triggered an NDR sell signal for U.S. stocks as the 20-day relative strength reading hits its weakest level since April. Meanwhile, both EM and Japan have generated buy signals, suggesting stronger price momentum ahead.

Attractive Valuations and Currency Tailwinds

Hayes points out that emerging markets are far cheaper than the U.S., which remains the most expensive regional market based on NDR’s global valuation metrics. EMs have also benefited from rising currencies and steady inflows into exchange-traded funds, signaling renewed investor confidence.

Japan, on the other hand, is being propelled by a weaker yen that supports exporters and boosts earnings. Investor sentiment has strengthened further amid optimism that the new government will deliver on its pro-growth policies. NDR’s internal data shows that 86% of Japan’s market indicators are bullish, the highest in over a year.

Portfolio Rebalancing Ahead

Given the shifting dynamics, NDR has downgraded U.S. equities to underweight, while upgrading Japan to overweight and increasing exposure to emerging markets.

“The duration of these trends can’t be predicted,” Hayes concludes, “but our models clearly favor continued U.S. underperformance — and leadership from Japan and EM.”

Investors seeking exposure to these regions can consider:

• iShares MSCI Emerging Markets ETF (EEM)
• iShares MSCI Japan ETF (EWJ)