Will US market concentration fade in 2025?

Aurèle Storno - CIO, Multi Asset
Aurèle Storno
CIO, Multi Asset

key takeaways.

  • 2024 market performance was extremely concentrated in US assets, challenging diversified investors and active managers 
  • This stemmed from the US’s unique fiscal circumstances, which drove that economy’s outperformance versus the rest of the world  
  • There is potential for less concentrated market performance this year, though a big question concerns the direction of fiscal policy, underscoring the need for diversification.

As 2025 get under way, we are mindful that two emerging macroeconomic shifts could profoundly impact markets, with divergent effects on returns.

Firstly, after two years of subdued global growth punctuated by US exceptionalism, a nominal recovery could invigorate the global economy. This suggests a more balanced performance across assets and regions. Secondly, there is potential for the start of fiscal tightening across North America and parts of Europe. We analyse the potential repercussions, particularly in terms of how different asset classes might react. 

A key question for 2025 is, which of those two factors will prevail?

US supremacy

The defining characteristic of the past year – the supremacy of US assets (especially equities) –  has challenged traditional principles of tactical asset allocation and spreading investments across asset classes and strategies. It stands in stark contrast to our fundamental convictions of diversification and dynamic risk management, designed to achieve long-term targets with controlled (total) risk. 

Nevertheless, our risk-based approach has proven invaluable, helping us stay close to our performance targets. These perceived challenges should not directly influence or alter our systematic investment process. However, they do guide our ongoing research and development efforts, as we strive to continuously adapt to global market trends and possible structural changes. 

Read also: Passive equities have never been so concentrated: can active managers provide diversification? 

Figure 1 illustrates the developments that made 2024 particularly noteworthy:

  • The S&P 500’s Sharpe ratio was 2.5 times higher than that of an equal-weight version of the S&P, despite delivering similar risk-adjusted returns
  • The MSCI World Index achieved a Sharpe ratio 5 times greater than that of the MSCI Emerging Markets Index
  • The difference in the Sharpe ratios of equities and bonds was 1.2 in 2024, a reversal of the trend over the past two decades, where bonds typically outperformed
  • A passive 50-50 capital-based portfolio demonstrated a Sharpe ratio four times higher than that of a standard risk-based benchmark


FIG 1. Sharpe ratios of various benchmarks 2004-2024 versus 20241 

Last year was not only extreme in terms of raw performance metrics, but also in risk-adjusted terms. The critical question now is: what were the underlying causes of this anomaly? We attribute it to two main trends from 2023 and 2024: a disparate slowdown in global economic growth and the unique fiscal circumstances of the US. 

We note that only a handful of stocks accounted for much of the US market return, reflecting specific themes (e.g., artificial intelligence) that skewed performance metrics.

Higher rates, slower growth

Considering only US data might raise doubts about the effectiveness of monetary policy. Interest rates escalated from 0% to 5.5% between 2022-2023, adversely impacting most asset classes in 2022. Yet the US economy’s nominal growth exceeded 6% for two consecutive years, translating into trillions of dollars of added economic value. The US clearly does not represent the entire global economy, however. Europe and China are frequently cited in contrast, portrayed as lagging while the US thrives. 

Figure 2, based on the November report from the International Monetary Fund (IMF), illustrates the percentage of world economies that are showing signs of macroeconomic improvement. It shows the growth of 2021-2022, as well as the deterioration during 2023-2024 – a natural reaction to the hawkish monetary policy deployed across developed markets. 

To encapsulate the situation: in 2023, 88% of developed market economies experienced a slowdown, with this figure falling slightly to 72% in 2024. This indicates that the economic situation in the US is quite exceptional, largely because of its unique fiscal circumstances: its primary deficit is a multiple of what it was during the Global Financial Crisis, yet without the crisis conditions.

A reversal?

Figure 2 also shows that a nominal recovery appears to be underway, with the IMF projecting that conditions will improve in 60% of developed market economies in 2025. This suggests that if the previous trend was characterised by US leadership over the rest of the world (RoW), a reversal of this might undo some of the concentrated performance. 

Therefore, the second critical element to consider is fiscal consolidation – the government policy measures for reducing budget deficits. 

FIG 2. Percentage of countries in the world experiencing an improvement in growth conditions2

Bonds and trends: the stars of 2025?

Fiscal consolidation remains only a potential risk at this point in the US. President Donald Trump’s economic agenda, which includes a corporate tax cut, points towards a worsening fiscal situation. However, this could be partially offset by measures such as trade tariffs and reductions in public expenditure, especially while economic growth remains robust. 

What would be the potential implications of steps towards fiscal consolidation? Figure 3 sheds some light by examining global aggregated data on debt-to-GDP trajectories and assessing market reactions. The top two charts delineate the historical performance of markets during years of fiscal consolidation versus those of fiscal expansion, defined by periods of decreasing or increasing global debt-to-GDP ratios. 

Read also: Tax reductions and deficits: lessons from Reagan to Trump 

Years with looser fiscal conditions tend to foster better market performance, while periods of declining debt do not generally benefit risky assets. From these charts, only bonds and trend-following strategies appear to maintain attractive return prospects during times of fiscal tightening.

It is also crucial to differentiate between active and passive forms of fiscal consolidation. Does it arise from direct cuts in expenses (active) or from expenditure remaining stable while enhanced growth leads to improved fiscal revenues (passive)? 

The lower section of the chart illustrates the historical market impact of each scenario, revealing that active consolidation typically exerts a more negative influence on developed market equities. In contrast, bonds and trend-following strategies continue to post attractive returns.

FIG 3. Average historical returns per asset class as a function of fiscal periods3

The challenge for 2025 lies in determining which factors might prevail between more balanced global growth prospects and the potential onset of fiscal consolidation. True to our investment philosophy, we choose not to favour one scenario over the other. We instead maintain a balanced approach by combining developed and emerging market equities with bonds and trend strategy allocations. And we are progressively adjusting to new information as our process monitors the evolution of a variety of market and macro indicators daily. 

This strategy aligns with our core investment principles and allows us to navigate through uncertain fiscal and economic landscapes effectively.

This insight is an excerpt from our latest quarterly edition of Simply put. To read the full report, please use the download button provided.

 

LOIM Asset Simplyput-Q12025.pdf

 

 

Simply put quarterly edition: Will fiscal policy catch investors off guard?

 

3 sources
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Bloomberg, LOIM. ‘Risk based’ stands for the S&P Risk Parity Index - 10% Target Volatility (TR). For illustrative purposes only.
2 Bloomberg, IMF, LOIM. For illustrative purposes only.​​​​​​​
Bloomberg, LOIM. For illustrative purposes only.

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