The Great Valuation Divide: Why Growth Stocks Face a Challenging Decade

A Strategic Shift Towards International Value Equities

The global equity landscape is shifting, and investors who fail to adjust their portfolios may find themselves on the wrong side of history. The dominance of US large-cap growth stocks, particularly tech giants, has driven the market for the past decade. However, as valuation gaps widen and historical correlations break down, the case for international value stocks is becoming increasingly compelling.

The US Market: A Valuation Bubble?

As of early 2025, US equities account for approximately 67% of the MSCI All-Country World Index, despite the US economy comprising only 25% of global GDP and 4% of the world’s population. This overrepresentation raises concerns about overvaluation. The S&P 500’s historical correlation with the MSCI EAFE Index (tracking non-U.S. developed market stocks) has plummeted to 0.54, well below the historical average of 0.83. Such a breakdown is a rare statistical event, suggesting that global markets may be entering a new regime.

Investor sentiment is also flashing warning signals. A recent Bank of America Global Fund Manager Survey found that 89% of respondents believe US stocks are overvalued—the highest percentage in over two decades. This is particularly relevant given the dominance of the “Magnificent 7” stocks (Nvidia, Apple, Microsoft, Amazon, Meta, Alphabet, and Tesla), which have driven a disproportionate share of market gains.

Expected Returns: The US Loses Its Edge

Forecasts from Research Affiliates indicate that US large-cap growth stocks may generate just 1.8% annual returns over the next decade—potentially negative after adjusting for inflation. This makes them the worst-performing asset class among the 40+ tracked in their database.

By contrast, non-US developed-market value stocks are projected to return 10% annually, with emerging-market value stocks expected to deliver 10.5%. These numbers highlight a historic valuation gap:

• Developed-market large growth stocks are currently priced at the 98th percentile of their historical valuations—more expensive than at any time except for 2% of historical data points.

• Developed-market large value stocks, on the other hand, are at the 2nd percentile, meaning they have been cheaper only 2% of the time.

This disparity suggests that US growth stocks face headwinds, while value stocks—particularly those outside the U.S.—offer a more attractive risk-reward profile.

Global Value Opportunities: Where to Look

The valuation disconnect extends across multiple regions, presenting opportunities for investors willing to look beyond US shores. Some of the most undervalued markets include:

• Brazil (9th percentile valuation) – The country has benefited from strong commodity exports and improving fiscal stability.

• Hong Kong (7th percentile valuation) – Despite geopolitical risks, key Chinese stocks listed in Hong Kong remain deeply discounted.

• Turkey (22nd percentile valuation) – While political risks persist, its equity market remains one of the cheapest globally.

Even European equities, which have largely been ignored by global investors, still trade at their 76th percentile—not as cheap as emerging markets, but certainly more attractive than US large-cap growth stocks.

My Outlook: A Necessary Shift in Investment Strategy

While US tech giants have fundamentally reshaped industries and driven exceptional gains, valuations matter. The reality is that at current prices, the odds of replicating the past decade’s performance are slim. Investors must adapt.

Key Takeaways for Investors:

1. Reduce Exposure to Overvalued US Large-Cap Growth – The Magnificent 7 have enjoyed a tremendous run, but their elevated valuations suggest lower forward returns. Taking profits and reallocating capital may be prudent.

2. Increase Allocations to International Value Stocks – The valuation gap between US growth and international value stocks is near historic extremes. Markets in Asia, Latin America, and select European countries provide compelling alternatives.

3. Consider Emerging Markets – With 10.5% expected annual returns, emerging-market value stocks may be one of the best opportunities in the coming decade. Investors should pay close attention to countries with strong economic fundamentals and discounted valuations.

4. Sector Diversification Matters – The next decade is unlikely to mirror the last. Sectors that lagged during the tech boom—such as energy, financials, and industrials—could see stronger relative performance as capital flows shift.

   
   

Final Thoughts: We Are Not in Kansas Anymore

The global market structure is evolving, and investors who fail to recognize these changes risk missing out on the best opportunities of the next decade. The US may have been the only game in town for the past 10 years, but the numbers are clear: that era is coming to an end. Those who embrace a diversified, valuation-driven approach will be best positioned for long-term success.