The last three years have been anything but normal for diversified investors. In 2022, stocks and bonds were both down in the same calendar year for the first time since 1974. This led to a dramatic increase in money market fund assets, which still exists today at a record $7.1 trillion. Then, in 2023, when virtually every market strategist on Wall Street was predicting a recession, U.S. GDP not only avoided recession but also grew way above trend, leading to a massive 26% return in the S&P 500 for which no one was positioned. Finally, in 2024, the S&P 500 delivered another 25% return that no one thought was possible, given starting valuations that continued to defy investor skepticism.

What made all this abnormal was a combination of several factors:

• Just seven stocks delivered over half the return of the entire index in 2023-2024
• The U.S. equity market delivered a whopping 14% average return over developed markets outside of the U.S.
• The U.S. dollar strengthened materially
• Fixed income markets had a negative three-year return by the end of 2024

We entered 2025 with investors positioned for this extraordinary environment to continue, but what we have gotten was a return to normalcy.

Principles of long-term portfolio construction

Every year for almost 30 years, J.P. Morgan Asset Management has produced our Long-Term Capital Market Assumptions (L TCMAs), a key driver of how we build strategic asset allocations that we believe can stand the test of time. While our tactical asset allocation process allows us to take advantage of cyclical opportunities, the LTCMAs allow us to identify more resilient “structural” asset allocation themes, including the three we highlight here.

1. Global diversification

Over the past few years this has been a hard topic for global allocators to rationalize with clients. In fact, you need to go back to 2017 to find the last year that the U.S. equity market underperformed its developed market peers. While “exceptionalism” is not going away, we do believe it will continue to normalize over the medium term, driven by U.S. growth, U.S. fiscal policy and U.S. interest rate policy converging with the rest of the world. 2025 has delivered on this theme with non-U.S. asset classes (MSCI ACWI ex USA) delivering a material 12% return over the U.S. (S&P 500), which is the largest outperformance since 1993. We also believe that U.S. investors are chronically underallocated to international markets. While an index weighting would call for approximately 65% of equity in the U.S. and 35% outside of the U.S., our Portfolio Insights analyses show that investors have roughly 80% invested in the U.S. and 20% outside of the U.S., creating a call to action.

2. Core bonds provide a ballast (again)

As inflation raged in 2022 to an annualized rate of 9.1% in June of that year, the Federal Reserve (Fed) embarked on one of its most aggressive rate hike regimes in history. This not only led to the Bloomberg “Agg” having its worst year in history (-13%), but it also created a distrust for bonds providing protection during times of lower equity prices. The “positive correlation” that took place during this rate hike cycle and into years 2023 and 2024, as the Fed kept rates at restrictive levels, led many to believe the 60/40 portfolio was dead. In the words of Mark Twain, “reports of my death have been greatly exaggerated.” As the risk has shifted away from inflation, with many economists (including the Fed) believing that any upside risk to inflation stemming from tariffs would likely be temporary, bonds have been able to provide the defense in portfolios that they have historically done throughout many cycles, which is fundamental to balanced investing. While cash may not lose money, it will not appreciate as bonds do if rates move lower. In fact, in 2025, bonds are exhibiting their most “negative correlation” to equities than at any point since the Fed started raising rates in 2022.

3. Normalization of U.S. dollar exceptionalism

Over the past few years, the divergence in U.S. growth and rate policy versus the rest of the world created ideal conditions for the U.S. dollar to outshine other major currencies. This created a “double whammy” of non-U.S. stocks not being able to keep up with U.S. indices as well as non-U.S. currencies underperforming the greenback. In our latest LTCMA report, we discuss a normalization of this exceptionalism and predict, for example, that the U.S. dollar is going to weaken to the euro by 120bps per year and to the yen by 190bps per year. 2025 has been a proof statement to this structural view. The U.S. dollar weakened by 11% in the first six months of 2025, which is the most to start a year since 1973. This has allowed investors in the U.S. to enjoy the benefits of both international equity and fixed income in their portfolios – in addition to the return of domestic markets. History has shown that periods of dollar strength have been cyclical rather than structural, as they have been followed by periods of dollar weakness, which may be driven by convergence of growth, rate and fiscal policy with the rest of the world in coming years. 

To conclude, while 2025 has been a roller coaster of headlines in a rapidly changing news cycle, it has also been a master class for diversification and the principles of portfolio construction, around which we have always remained disciplined. This is not a call to action to “sell America” by any means, but more of a return to normalcy with the relationship between stocks and bonds as well as the role that international assets play along with U.S. assets. Perhaps the most abnormal position is the amount of cash in money market funds – which is why now may be the time to put some of the $7.1 trillion to work – as markets get back to normal.