Investment Trends in Focus: Keeping Pace with the First-Half Market Reshuffle

For 80 years, the United States has been the “indispensable nation.” In defense and security, its influence has been anchored in NATO but felt around the world; in economics, it has forged a global system of free trade governed by legally binding multilateral arrangements and — for nearly 50 years —an equally free flow of capital.

As we entered 2025, U.S. exceptionalism had rarely ridden higher, as the U.S. concluded yet another year of equity market dominance over the rest of the world, accounting for 70% of global market cap and 60% of private investments globally. Enthusiasm for all things American, from a new administration seen as “capitalist friendly,” to AI companies, seemed unbounded. Investors entered 2025 effectively “long America.”

Six months later, the U.S. dollar has slumped by 10% against its developed market (DM) peers — two-thirds of its cumulative gain since the 2008 global financial crisis (GFC) — and 7% against emerging market (EM) currencies. In the first quarter, the U.S. equity market recorded its worst quarterly performance against the rest of the world since 1986.

In our review of the historic first six months of 2025, we go deeper into performance before asking the headline question: Is this a temporary shift or the beginning of an enduring realignment? We also revisit the ongoing stresses in private markets, where private equity risks may have become a gilded cage for its investors.

From the 2008 global financial crisis onward, U.S. assets outperformed their DM-ex-U.S. and EM peers by a wide margin across most asset classes, from public and private equities to private credit and real assets.

The divide was most stark in listed equities. In USD terms, U.S. stocks beat the rest of the world by roughly 7% a year between 2009 and 2024, while DM-ex-U.S. currencies fell about 15% cumulatively against the U.S. dollar, as measured by the MSCI World ex U.S.A Currency Index.

The policy and technological shocks of the first half of 2025 reversed those trends. The U.S. administration announced major changes in its approach to defense cooperation, multilateral trade agreements and tax policy.  In response, Europe rolled out its own fiscal expansion, and long-term yields climbed in Germany, the UK and Japan.

With macro signals in flux and trade-policy risks resurfacing, we asked institutional investors earlier this year how they planned to adjust. Their dominant answer — broaden geographic diversification — is already materializing. The result has been a cross-border shift toward markets outside the U.S.

Returns are annualized in U.S.D from 2009 through 2024 and cumulative for 2025 through June 30. Private-asset returns are through March 31, 2025. All indexes use MSCI Global Equity, Global Fixed Income, Private Capital Solutions and Global Currency methodologies. Emerging-market bond indexes include U.S.D-denominated issues only.

U.S. shares entered 2025 “priced for perfection,” with earnings multiples roughly twice those of major peers. While analyst downgrades have begun and earnings forecasts slashed across U.S. segments (most sharply in import-sensitive small caps, but also in the AI-heavy mega-cap cohort) valuation risks remain. U.S. equities are still among the world’s most expensive, as measured by the price-to-earnings growth (PEG) ratio, notably in mega caps, despite slower growth in that part of the market.

Returns are annualized from 2009 through 2024 and cumulative for 2025 through June 30. Regions are based on MSCI Global Equity Index methodology and reflect both local equity markets and each currency.

In contrast, sentiment has brightened across several emerging and European equity markets. EM equities’ rebound, after a lackluster post-GFC run, may also reflect improving fundamentals, with average EM corporate-bond ratings now sitting at multi-year highs.

The second largest area of dislocation has been around currencies. Currency risk has been rising since interest rate hikes began in early 2022, and the dollar’s slide has further eroded equity returns for overseas investors in the U.S. Our models show the steepest increases in risk for JPY- and EUR-based investors in U.S. stocks, pushing their risk above that of even EM stocks. For JPY-based owners of U.S. stocks, currency explains roughly 30% of volatility, and nearly all the risk in Treasurys.

Europe’s first-half outperformance over the U.S. comes second only to the post-Plaza Accord surge of 1985, when the G5 nations agreed to weaken an overvalued dollar. Hedging questions that once preoccupied dollar-based investors have flipped: Global investors must now decide whether to hedge U.S. exposure.

Asset classes use the MSCI Global Equity and Global Fixed Income Indexes, or representative commodity baskets. Risk decomposition shown from home currency perspective and uses the MSCI Multi-Asset Class Model as of June 30, 2025.

So, is this quarter a brief interregnum or the start of a lasting shift in the investment world? Here, we offer two pieces of evidence that may offer clues.

First, the U.S. has historically benefitted from its status as the currency of last resort: When times get tough, investors buy U.S. Treasury bonds. As a result, in times of crisis when equity markets fall, the U.S. dollar appreciates, and U.S. Treasury bonds rally. By contrast, crisis capital flees countries investors perceive as having weak or unreliable institutions (traditionally emerging markets), and so their currency and bonds fall at the same time as their equity markets.

For the U.S., there have been only rare exceptions to this enviable pattern of market behavior. We defined Triple-Red moments as periods of significant sell-offs in U.S. equities, U.S. Treasury bonds and the U.S. dollar, and cataloged all these periods since the early 1970s. The most notable Triple-Reds were during the 1970s, when oil shocks, Vietnam-era deficit spending and a Fed that lacked credibility led to the collapse of the Bretton-Woods system. Other episodes followed Black Monday in 1987 and a period around the first Gulf War in 1991.

Chart shows end date vs. return horizon and is marked red if 1) U.S. equity return < -10%, 2) U.S. dollar index return < -4.5%, and 3) U.S. Treasury yield change > 25bps. The grey lines connect points with the same start date. Source: Federal Reserve Board, retrieved from FRED, Federal Reserve Bank of St. Louis, MSCI.

The sell-off following the U.S. tariff announcements on April 2 was the first instance of any Triple-Red since 2002, albeit brief. For now, U.S. equity and bond markets have recovered, but the occurrence of any Triple-Red moment, however fleeting, is sufficiently unusual that it suggests something tectonic may be occurring.

A second piece of evidence comes from the relationships between global equity markets. Our analysis below shows betas from the MSCI Global Equity Factor Model to the U.S., EM and Europe. Just after the GFC, when the world seemed to be inevitably globalizing, virtually all markets clustered together, showing some influence from each of the three regions. By contrast, even before 2025’s tariff shocks, markets were clustering around the U.S., Europe and EM as three distinct poles. The tripolar structure has sharpened further this year, suggesting to many that diversification benefits may be stronger now than they were in the aftermath of the global financial crisis, when many individual markets still moved in close unison.

The MSCI Global Equity Factor Model is used estimate each country's beta to the MSCI U.S.A, Emerging Markets and Europe IMI indexes. Betas are as of Dec. 31, 2009, and June 30, 2025. Each circle represents an MSCI country index.

Though NAVs and distribution rates in the private markets tend to trail listed-equity returns, there is so far no sign that exits are benefiting from the equity run-up in 2024. In fact, the annualized distribution rate from private equity hit a nearly catatonic 7% in the first quarter of 2025, less than a third of the historic rate from 2016-2021 and well down on even the sluggish pace of 2022-24.

For limited partners (LPs) that rely on those cash flows to meet capital calls or other obligations, the risk is clear: If public markets weaken again, they could be forced to liquidate listed holdings at depressed prices, ultimately tightening the fundraising tap.

Data for global closed-end funds from the Q4 2024 update of the MSCI Private Capital Universe.

Since the Fed began raising rates in 2022, the higher cost of capital has compressed valuation multiples and encouraged general partners (GPs) to lengthen holding periods. Among the assets that did exit between 2022 and 2024, EBITDA multiples were lower than those of assets still held. Although the remaining portfolio companies are carried at richer multiples than the recent exits, they are grappling with reduced profitability and rising leverage — raising questions about their valuations and paths to exit.

Data as of Q4 2024. Ribbons represent the upper and lower bounds of the interquartile range. Shaded area highlights the years when exited assets’ median EBITDA multiple was higher than that of held assets. EBITDA multiple = total enterprise value/EBITDA. Source: MSCI Private Capital Universe

Buyout holdings with higher debt loads relative to EBITDA face mounting pressure as elevated coupon costs erode their ability to cover interest expenses. Higher median coupons have effectively lowered the implied leverage cap based on 2x interest coverage, shrinking the headroom between that cap and current median leverage.¹

With their headroom narrowing, buyout holdings may have limited scope for dividend recaps and scant ability to fund growth levers such as capex or bolt-on acquisitions through additional borrowing.

This leverage squeeze may threaten to further dampen the already weak LP distributions and slow portfolio-company growth, ultimately pressuring future exit valuations to complete and restart the cycle. By Q4 2024, about 45% of buyout holdings were in outright breach of the implied 2x interest-coverage based leverage cap — more than triple the 2010-2019 median of 13%.²

Data as of Q4 2024. Leverage-cap and headroom calculations use base rates data (retrieved May 28, 2025) and private-debt cash spreads, net debt and EBITDA data. Source: Federal Reserve Bank of St. Louis’s FRED, MSCI private-credit security-terms dataset, MSCI Private Capital Universe

Despite a tentative détente in the tariff dispute that dominated headlines during the first half of the year, policy uncertainty — including whether the “90-day pause” on U.S. tariffs will end July 9 or August 1 — is likely to keep market risk elevated through the remainder of 2025. We believe four signposts are worth watching:

1. U.S. dollar’s path: Additional swings in U.S. yields and foreign exchange would reshape hedging decisions on U.S. assets. Scenario testing hedged versus unhedged positions can help clarify potential impacts.
2. Valuation reset: A ratings adjustment in U.S. equities could arrive if still-rich valuations bow to softening growth forecasts, reopening the case for investors looking into broader geographic diversification.
3. Cross-asset correlations: Recurrence of the rare episodes of U.S. stocks, the dollar and Treasurys selling off together remain plausible. Stress-testing portfolios can quantify resilience to correlation spikes.
4. Private-market indicators: Valuation lags can mask stress in private markets, but distribution rates, squeezed leverage headroom and exit-multiple dispersion already signal tighter conditions. Tracking these metrics provides early warning signals.

MSCI continues to monitor these signals and will update clients as evidence evolves.