Is a shake-up in the global equities market underway? It’s been top of mind for many investors amid a broad sell-off of America's technology giants and a rotation into certain non-U.S. equity markets.

After closing at a record high on February 19, the S&P 500 Index tumbled 10% through mid-March but has clawed back some of those losses. Year to date through March 31, the S&P 500 is down 5%, while the Nasdaq Composite is off 10%. And the high-profile Magnificent Seven group of stocks have tumbled 16% this year, hit by worries over massive spending on artificial intelligence, following the shock emergence of DeepSeek, a startup in China.

By comparison, international stocks have shined. The MSCI ACWI World ex-USA Index has gained 7% and the MSCI Europe Index has risen 12%.

While there are some interesting investment opportunities in Europe and Asia, as well as companies with dominant global market positions in several industries, there is a diverse set of growth candidates among U.S. large caps outside the Mag 7.

“I wouldn’t discount the power of U.S. equities just yet,” says Anne-Marie Peterson, principal investment officer of The Growth Fund of America. “American innovation is thriving across industries due to a culture that fosters entrepreneurialism, the ability to access capital and attract top-rate talent.

“While certain Mag 7 companies may not offer the best relative returns longer term, I’m optimistic that the U.S. is the best hunting ground to find the next wave of large cap companies that can expand in market value.”

The ongoing correction in the S&P 500 is a reminder that constructing a U.S. portfolio limited in exposure to only a couple dominant factors can result in elevated concentration risks and high valuations. Instead, investors should consider how they could capture U.S. growth more broadly.

Drivers of U.S. dominance remain intact

The U.S. equity market has been the clear winner for many years. So what’s driven the dominance?

Exceptional earnings growth has been one catalyst. In the recovery following the great financial crisis of 2008 and 2009, U.S. companies generated earnings that far exceeded non-U.S. companies, supporting multiple expansion. And by 2024, that earnings gap reached its widest level in 12 years.

All in, the U.S. has exhibited stronger productivity growth compared to most nations. A large labor pool and large capital expenditure cycles are among many factors contributing to such productivity. The U.S. has also generally leaned towards deregulation. And companies have historically rewarded shareholders through capital allocation and incentivized employees.

Companies can also have first mover advantage helped by a more benign regulatory environment and strong consumer purchasing power. Waymo, Alphabet's self-driving vehicle business, is one example. Waymo has tested robotaxis in a few major U.S. cities, reaching 4 million passenger rides last year, with plans to enter Austin and Atlanta this year. 

Why Mag 7 returns may diverge 

Long before the rise of tech giants such as NVIDIA and Meta, U.S. market indices were dominated by the likes of ExxonMobil, Intel, General Electric and Citigroup. History has shown that leaders of one decade may not translate to the next.

“We've seen other periods of innovation, and innovation doesn't always equal returns for investors. And I think we may be reaching one of those periods of time where the leading technology companies may not be the best stocks to invest in,” says Chris Buchbinder, portfolio manager with The Growth Fund of America.

The shift to AI from cloud computing is likely to result in new competitive dynamics and differentiated return profiles among U.S. tech giants. AI is requiring far more capital investment than cloud technology did 10 years ago. Cloud computing itself may become a lower margin business due to increasing competition. On the upside, the technological benefits of AI could be leveraged by a wider group of companies to their advantage.

“We’ve been in a 15-year cycle and now things are changing, whether it’s the technology, the cost of capital due to higher interest rates or the realignment of global supply chains. As a growth investor, I believe a wider array of U.S. large caps can benefit from these shifts,” Peterson said. 

Still, individual companies within the Magnificent Seven group may continue to provide investors with superior returns and earnings growth. But we think investors should take a broader view going forward. 

Seek diversification in a concentrated market

The current crop of megacap tech stocks exemplifies U.S. dominance. However, there are opportunities to discover scalable and dominant businesses in other industries.

Costco has built a durable model in the club grocery business and developed an online sales platform to fend off competition from Amazon in grocery. Costco’s valuation has steadily increased over time as investors have shown faith in its longstanding business model. About 10 years ago, Costco had a P/E ratio of about 30x versus 54x currently.

Companies that are less capital intensive but can benefit or leverage AI’s development may be potential diversification candidates. Take silicon wafer design company Synopsys. It’s not a household name when it comes to technology stocks. But the nearly 40-year-old firm may receive interest from companies designing their own chips for AI applications.

Importantly, America’s preference for deregulation to foster competition and innovation, paired with a large consuming population, enables companies to achieve scale and mass adoption. 

Uber has made rapid gains in ridesharing and food delivery since launching in 2010. Uber completed its IPO in 2019, and given its success and continued growth, the company was added to the S&P 500 Index in December 2023 and the Dow Jones Transportation Average the following year.

DoorDash, a peer in the food delivery industry, recently joined the S&P 500, building on consumer demand and ease of use, akin to Uber. Airbnb is another example in the rental home business for vacations and short-term accommodations.

Not to be forgotten are industrials. The group generally expands at a rate above GDP growth. And now, reshoring has added additional growth prospects. Another advantage: Some companies have built up strong defensible businesses that are global, scalable and not susceptible to disruption. Plus, the integration of more advanced software is transforming traditional manufacturing processes. 

Innovation could spark resurgence in health care

In health care, AI is playing a role in helping to speed up drug development. While government policy has negatively impacted share prices after a strong run during COVID, we could be on the verge of a golden era of drug discovery. Some of this potential growth may be underestimated by the broader market. 

Investors poured an incredible amount of capital into the biotech and pharmaceutical industries over the past several years, resulting in the creation of intellectual property and know-how that will likely be improved upon for years to come. As such, there’s potentially an explosion of new therapeutic opportunities coming over the next decade.

“Since the pandemic, health care has lagged as an industry, but the pace of innovation's been almost as good as the technology industry. It's been quite incredible,” Buchbinder said. “Health care is a sector where the valuations don't reflect the level of enthusiasm in some of the technology and AI-related stocks.”

There are also other attractive areas. For instance, hospital chain HCA Healthcare has built a network of irreplaceable assets and contains significant pricing power with insurers. Now, the company seeks to leverage AI to drive earnings growth without significant capex. The latter is key as some investors express concern around capital intensity and the commoditization of AI.

Non-U.S. companies have exposure to U.S. growth

Many multinationals listed outside the U.S. generate large pools of revenue from outside their country of domicile.

Gaining exposure to this broader range of stocks, potentially at lower valuations, can be a way for investors to tap into the U.S. growth story without unnecessary concentration risks. Given stocks in regions outside the U.S. generally trade at much lower valuations, there is potential for equities to re-rate higher.

Stronger earnings growth is projected for international markets. Consensus projects earnings for the MSCI ACWI ex-USA Index to rise 11.5% and 9.8% for MSCI EAFE Index (developed international), based on FactSet data as of March 25. These indexes are more weighted to heavy industry, energy, materials and chemicals than the S&P 500 Index.

Beneficiaries could be those involved in the upgrade of U.S. physical infrastructure and building new manufacturing sites as part of reshoring efforts.  For example, Taiwan-based TSMC, the world’s largest semiconductor manufacturer, and European industrials such as Siemens AG or Schneider, are among companies participating in this fiscal spending wave. 

Take a broader view of U.S. growth

The opportunities to capture U.S. growth are broad. It may include tech leaders, but also diversification in areas such as industrials, health care and consumer discretionary.

The U.S. equity market has created a record of superior returns based on exceptional earnings growth that has attracted higher valuations. More agile resource allocation, a favorable regulatory environment and the scalability of a large single domestic market have also supported returns historically.

While many investors have recently expressed optimism around growth in non-U.S. markets, such as India and Japan, the DNA of U.S. markets remains intact.

Projected earnings for the S&P 500 remain robust at 11% this year. But with valuations at 20 times earnings on a 12-month forward basis, versus the 10-year average of 18 times, growth will come at a price. Investors will have to carefully weigh the challenges against the opportunities. 

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