Analysis of the Impact of Investors' Diversification Trend on US Stock Valuations and Global Market Rotation

Now I will provide you with a systematic and comprehensive analysis report.

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According to a report released in January 2026 by the team of Citi Group strategist Beata Manthey [1][2], the core forecasts include:

Forecast Item	Details
MSCI AC World Index Target	End-of-year close at 1360 points, approximately 10% higher than current levels
S&P 500 Index Forecast	Will rise 11% in 2026
Core Logic	Convergence of profit levels between the US and the rest of the world
Key Drivers	European government spending, Japanese reflation, widespread application of AI technology

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Index	Price-to-Earnings (P/E) Ratio	2025 Gain	2026 EPS Growth Forecast
S&P 500	28.5x	+2.11%	+8.5%
Nasdaq	35.2x	+1.63%	+12.2%
Euro Stoxx 600	16.8x	+8.50%	+12.8%
Nikkei 225	22.1x	+12.30%	+10.5%
MSCI AC World	19.5x	+5.20%	+10.2%

• Average P/E of US Stocks: 31.9x
• Average P/E of Non-US Markets: 19.5x
• US stocks trade at a valuation premium of approximately 64%
  [0]

This valuation disparity provides a theoretical basis for capital rotation.

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From Q4 2025 to early 2026, multiple signals indicate that capital allocation is shifting from US stocks to non-US markets:

• European markets outperform expectations
  : The Euro Stoxx 600’s USD-denominated gain has surpassed that of the S&P 500 [1]
• Strong Japanese stock market
  : The Nikkei 225 has risen over 12% year-to-date, leading major global markets [0]
• Emerging markets gain appeal
  : Institutional investors begin increasing allocations to Asia ex-Japan [3]

Top institutions including Goldman Sachs and Morgan Stanley expect the “Great Rotation” pattern to continue in 2026 [4]:

• Goldman Sachs’ View
  : AI dividends will spread from the seven US tech giants to broader sectors
• JPMorgan
  : Bullish on emerging market bonds and UK gilts, while selectively allocating to US stocks
• PIMCO
  : US stock valuations remain near historical highs entering 2026, and the sustainability of returns concentrated in a few tech giants is questionable

Renowned economist Hong Hao pointed out [5]:

“Starting from the second half of the year, we advised clients to shift profits from US stocks to non-US markets. The main reason is that the performance of US stocks relative to other markets has reached a historical high, and it may be unrealistic to expect it to continue outperforming.”

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Key Factor	Realization Probability	Detailed Explanation
Profit Convergence	75%	Non-US markets’ 2026 EPS growth forecast (12.8%) is higher than that of US stocks (8.5%)
Diversification Trend	85%	Investor confidence in international stocks strengthens, risk appetite expands
Valuation Repair Room	88%	The 64% valuation premium of US stocks provides ample room for correction
AI Technology Spillover	80%	AI applications spread from the US to the globe

Risk Factor	Impact Level	Explanation
US High Valuations Absorb Gains	High	If US stocks rise, it may offset contributions from non-US markets
Geopolitical Uncertainty	Medium	Trade frictions and policy changes may disrupt markets
US Dollar Trend	High	A weaker US dollar is a key condition for non-US market performance
Federal Reserve Policy	Medium	The pace of interest rate cuts affects global liquidity

Scenario	Probability	MSCI AC World Gain
Baseline Scenario	55%	+10% (in line with Citi’s forecast)
Optimistic Scenario	25%	+15%
Conservative Scenario	15%	+5%
Pessimistic Scenario	5%	0% or decline

The probability of Citi’s forecast of a 10% rise being realized is approximately 55-60%

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Capital Diversification → Increased Capital Inflows to Non-US Markets → Capital Outflow Pressure on US Stocks
                              ↓
                    US Stock Valuation Multiples Face Pressure
                              ↓
              MSCI AC World Index Rises (Driven Mainly by Non-US Markets)

• Valuation Convergence
  : US stock P/E ratios may revert from 31.9x to the global average of 19.5x
• Weight Adjustment
  : If capital flows out of US stocks, it will reduce the weight impact of US stocks in the MSCI AC World Index
• Profit Reassessment
  : Improved earnings in non-US markets drive the overall index higher

Hong Hao noted [5]: “Historically, there have been only a few instances where valuations reached such heights. Generally speaking, at this valuation level, the average annual return of US stocks over the next 7 to 10 years is often in single digits.”

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Based on the above analysis, investors are advised to adopt the following strategies:

Region	Allocation Recommendation	Rationale
US Stocks	Maintain but reduce weighting	Valuations are high, but AI-driven earnings growth remains attractive
Europe	Overweight	Increased government spending + valuation advantages
Japan	Slightly overweight	Reflation process advances
Asia ex-Japan	Overweight	China’s independent AI ecosystem + valuation trough
Emerging Markets	Neutral weight	Performs better when the US dollar weakens

• Increase exposure to non-US equities
  : Leverage valuation advantages
• Allocate to safe-haven assets
  : Gold and the Japanese yen as diversification tools
• Focus on cyclical sectors
  : Traditional cyclical stocks such as industrials and energy may benefit from capital rotation

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1. Sustainability of Capital Rotation
   : It is necessary to confirm that the shift of capital from US stocks to non-US markets is a trend rather than a temporary phenomenon
2. Earnings Improvement Delivery
   : European and Japanese markets need to actually achieve earnings per share improvements
3. US Dollar Trend Alignment
   : A weaker US dollar will significantly boost USD-denominated returns of non-US markets
4. Federal Reserve Policy Path
   : Moderate interest rate cuts will provide liquidity support for global stock markets

• The probability of Citi’s forecast being realized is approximately 55-60%
• Risk-adjusted expected return range is 8-12%
• Investors should adopt a more balanced global allocation strategy rather than completely exiting US stocks

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[1] Sina Finance - “Citi Strategists: Investors Will Further Diversify Allocations and Reduce Reliance on US Stocks” (https://finance.sina.com.cn/stock/usstock/c/2026-01-12/doc-inhhaeyt5593578.shtml)

[2] Cailianshe - “Citi Strategists: Investors Will Further Diversify Allocations and Reduce Reliance on US Stocks” (https://m.sohu.com/a/975299941_222256)

[3] Investing.com - “Citi’s Manthey Says More Investors Seek Allocations Outside US Stocks” (https://cn.investing.com/news/stock-market-news/article-3161011)

[4] Wall Street News - “Wall Street’s Multi-Strategy Surges! The ‘Rotation’ Trend in Global Stock Markets…” (https://cn.investing.com/news/stock-market-news/article-3136636)

[5] Wall Street News - “Hong Hao: US Stock AI Bubble Burst Is Premature, But Valuations Are Too High, Refer to History” (https://wallstreetcn.com/articles/3761627)