Time to reduce U.S. equity exposure?
By James Parkyn - PWL Capital - Montreal
Is it time to scale back on U.S. stock holdings? Investor concerns have intensified about equity market performance and tariff-related volatility south of the border.
The U.S. total market gained a modest 4.2% in Canadian dollars in 2025 through the end of July.
This was well behind vigorous rallies in many other countries:
The Canadian total market has soared 12% year to date.
International developed large and mid-cap stocks have shot up 13.5% in Canadian dollar terms.
Emerging market large and mid-cap stocks have surged 13.6% in CAD terms.
(See our Market Statistics page for more data.)
Winning streak over?
The U.S. slump is especially striking because Wall Street handily beat international stocks for most of the period since the 2008-09 financial crisis.
The U.S. total market returned about 13.5% annually between 2010 and 2024, vastly better than international stocks, which gained an underwhelming 4.8%, according to Morningstar Direct.
Does this year’s shift mean the era of superior U.S. returns is over? Should we reallocate away from U.S. stocks?
Compelling case for diversification
The short answer is no. As we said in our podcast on the same topic, there is a compelling case for diversification within stocks. Our model allocates 20% to Canadian stocks, 50% to the U.S. and 30% to international stocks.
The balance between U.S. and international stocks is in line with their share of global market capitalization.
As U.S. or other stocks have outperformed, we have rebalanced to maintain these target allocations.
U.S. equities still vital
Changing the model now smacks of market timing or trying to forecast the future. And the evidence is overwhelming this doesn’t work.
Regardless of any short-term underperformance, the evidence is clear that U.S. equity investments should be a major part of our clients’ portfolios.
As we noted in May, U.S. equities have returned an impressive 9.7% annually since 1900, according to the UBS Global Investment Returns Yearbook 2025.
“Never bet against America”
Warren Buffet famously put it like this in his 2020 letter to shareholders: “Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.”
Excellent U.S. returns are due in large part to the strong U.S. dollar and tech boom. This includes stellar gains in the “Magnificent Seven” mega-stocks, which we’ve discussed previously. As well, investors have proven willing to pay higher multiples for U.S. stocks.
But high returns come with a price: volatility. Since 1900, U.S. equities have seen six years with annual returns below negative 40%. Patiently waiting out these drawdowns is crucial if we want to enjoy the longer-term gains.
U.S. valuations at historic extreme
What can we expect from U.S. stocks in coming years? Some analysts predict slowing U.S. earnings growth in coming years. Others say U.S. equities could continue to underperform due to excessive valuations, even despite this year’s trailing results.
Valuations may reflect “overly optimistic expectations” about future growth and the U.S. return edge, according to investment firm AQR Capital Management.
“By the end of 2024, relative valuations were at a historically extreme level, and we argue that some mean reversion is a sounder assumption than extrapolation of further richening,” AQR said in a report.
Investors “should know that the US has underperformed the rest of the world for extended periods, for example the decades of 2000s, 1980s, and 1970s.”
International diversification paid off
But as we know, it’s notoriously difficult to forecast the markets. Analysts consistently get it wrong.
What we do know is that international diversification has paid off. This year’s developments in stock markets simply confirm that.
The UBS Yearbook 2025 provided more evidence. It found that globally diversified portfolios have generated higher risk-adjusted returns over the past 50 years than investing in only domestic assets in almost all countries.
Discipline brings peace of mind
Disciplined—relying on a broadly diversified long-term investing strategy and not chasing trends—allows us to capture returns when leadership changes.
Patience is also key. Avoid letting short-term swings or headlines dictate your moves. Markets reward those who stay invested from one cycle to the next.
Find market statistics, model portfolios, more commentary, past blog posts, eBooks and podcasts on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.