After trailing other regions in the first half of 2025, the US performed well in the third quarter, with the S&P 500 Index posting a strong total return of over 8%². The tech sector was the key driver of US performance. Investors remain positive about eventual AI demand, boosting the share prices of many AI-linked companies. The mega-cap tech firms are also optimistic: they are expected to spend nearly $600 billion on capex in 2025 to expand their AI capabilities. Technology investment has not just propelled the US stock market; it has also supported the US economy. Following the Covid pandemic, industrial production in areas such as communications and computers has significantly outpaced that of “non-tech” industries, while tech capex has contributed nearly half of the US’s real GDP gains since the start of 2023. Evidence of rising AI demand will therefore be needed to maintain investor optimism, the pace of tech capex, and US economic resilience more broadly.

US industrial production

Index level, rebased to 100 in January 2020

¹ Local currency, total return.
²  Past performance is not a reliable indicator of current and future results.

While the US stock market has been supported by tech optimism, other regions also posted solid returns over the third quarter. For example, the export-oriented Japanese market rebounded sharply after the US and Japan agreed a trade deal, and the UK’s FTSE All-Share rose 7% despite domestic economic uncertainty. We believe regional diversification should continue to play a key role for global equity investors looking to avoid overexposure to any one sector or market, particularly with tech making up nearly 25% of the S&P 500 and US firms accounting for around two-thirds of the MSCI World Index. By looking globally, investors can diversify their tech exposure beyond the “Magnificent Seven”, as well as ensure their portfolios are not overexposed to technology at the expense of other sectors with potential secular tailwinds. For example, a rise in global defence spending should support industrials’ earnings across regions.

US weight in global equities and tech weight in the US

% of market cap

Thus far in 2025, US and Japanese companies have delivered stronger profit growth than seen in other regions, such as Europe. This trend partly reflects the sector composition of each stock market—the UK’s FTSE All-Share, for example, features more energy firms, whose profits have been hindered by lower oil prices, while the MSCI Europe ex-UK Index features fewer of the tech stocks whose earnings have been propelled by AI enthusiasm. However, in 2026 equity analysts project that profit growth in Europe will accelerate. This optimism is partly due to policy tailwinds, such as Germany’s huge fiscal stimulus package focused on infrastructure. And in the UK, the FTSE All-Share generates three-quarters of its revenues overseas, so expectations for resilient global growth (and resulting commodities demand) contribute to a forecasted pick-up in profits next year. Active, globally-minded investors can take advantage of such tailwinds, focusing on the sectors or markets that are best placed to deliver earnings growth.

Consensus estimates for global earnings per share growth

% change year on year

Despite analysts’ expectations for more balanced earnings growth next year, equity market valuations remain dispersed across regions. In the US, the S&P 500 index sits on a multiple of 23 times expected 12-month forward earnings. This multiple is driven by the US market’s largest stocks: the top ten stocks in the S&P 500 trade on a valuation of 30x, reflecting enthusiasm about medium-term profit growth partly driven by AI optimism. However, even the remainder of the US index looks relatively expensive compared to its history, on a multiple of 21x. By contrast, European stocks trade broadly in line with their long-run average valuations. Nearly every sector in the MSCI Europe Index still trades at a larger-than-average discount to its US counterpart, despite the region’s more supportive fiscal outlook. This cross-market valuation dispersion suggests there are opportunities for active stock pickers to pick up quality companies at attractive valuations.

Global forward P/E ratios

x, multiple

If uncertainty around US economic policy picks up, or investors become concerned about the speed of AI deployment, stock market volatility could increase. In this scenario, a tilt towards income in equity portfolios can help make total returns more resilient. While European equities have historically offered stronger dividend yields than many other regions, a growing emphasis on corporate governance in Asia has led to improved shareholder management and rising buyback and dividend yields. At the same time, high dividend payers across global equity benchmarks are still trading at large discounts to their peers. With payout ratios in most regions yet to recover to pre-pandemic levels, companies with strong free cash flow generation and resilient business models appear well positioned to maintain dividend payouts even if earnings come under pressure. Investors may therefore wish to consider a global income buffer to help diversify their equity portfolios.

Buyback and dividend yields

% yield