US Equities in 2026: Valuations, Concentration, and What Comes Next

The US equity market is the single most important investment market in the world. The S&P 500 represents approximately 60-70% of the MSCI World Index, the benchmark against which most global equity funds are measured. For any international investor holding a globally diversified equity portfolio, decisions about US equity exposure are implicitly decisions about the majority of their equity allocation.

Over the fifteen years from 2010 to 2024, US equities delivered extraordinary outperformance relative to non-US developed market and emerging market equities. The S&P 500 annualised at approximately 13-14% during this period versus roughly 7-8% for the MSCI EAFE (Europe, Australasia, Far East) and even lower for emerging markets. An investor who overweighted the US or simply held a global market-cap index was richly rewarded.

Understanding why this happened, whether it is likely to continue, and what the specific risks and opportunities are in 2026 is essential for international investors navigating US equity exposure.

The structural dominance of the US market

American equity market dominance is not arbitrary. Several structural factors explain why US companies have generated superior earnings growth and attracted premium valuations.

Technology leadership. The world's most valuable technology companies — Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta — are US-listed and genuinely global businesses. US technology companies generate significant revenues outside the US: they are not merely large domestic companies but global infrastructure providers. Cloud computing, search, social media, semiconductor design, and enterprise software are substantially US-dominated.

Capital market depth. The US capital markets are the deepest and most liquid in the world. US companies can raise capital more efficiently than most international peers. The depth of institutional investor base, analyst coverage, and corporate governance infrastructure creates an environment that is more conducive to equity investment.

Shareholder orientation. US corporate culture has historically been more shareholder-return-oriented than many international peers. Buybacks, dividends, and return on equity are prioritised. Corporate governance forces accountability to shareholders that is less present in some continental European or Asian corporate cultures (though this is changing).

Dollar reserve currency. The US dollar's status as the world's reserve currency means that US financial assets benefit from global demand for dollar exposure as a store of value and medium of international trade.

Innovation dynamism. The US venture capital and startup ecosystem has consistently produced new categories of global business — from biotech to fintech to defence technology — that create new equity market opportunities unavailable in most other countries.

These structural advantages are real, not illusory. They explain why US equities have deserved a premium to international peers.

The concentration problem

One of the most significant and underappreciated risks in US equity investing is the extreme concentration that has developed in major indices.

In 2024, the "Magnificent 7" technology companies — Apple, Microsoft, Nvidia, Amazon, Alphabet (Google), Meta, and Tesla — represented approximately 30-33% of the entire S&P 500's market capitalisation. This is an unprecedented level of concentration in a supposedly diversified index of 500 companies.

The implications are substantial. An investor who bought a "passive" S&P 500 index fund in 2024, believing they were receiving diversified US equity exposure, was effectively making a concentrated bet on a handful of technology companies. If those seven companies underperform, the index underperforms, regardless of how the remaining 493 companies perform.

This is not inherently wrong if those companies genuinely justify their valuations. And for much of the recent period, they did: Nvidia's earnings growth from AI chip demand was extraordinary; Microsoft's cloud computing revenues grew consistently; Meta's profitability recovered sharply after a difficult 2022. The concentration reflected genuine economic outperformance.

The risk is forward-looking: at 30% of the S&P 500, these companies need to continue delivering exceptional performance to justify current weights. Any disappointment — earnings misses, regulatory action, competitive disruption — would affect the entire index disproportionately.

Investors concerned about this concentration can consider equal-weight S&P 500 ETFs (which weight each of the 500 companies equally rather than by market cap) or "ex-FAANG" strategies. These provide US equity exposure with less mega-cap concentration.

Valuations in 2026

US equities trade at elevated valuations by historical standards. The CAPE (cyclically adjusted price-to-earnings ratio), which smooths earnings over a 10-year period to remove cyclical distortions, was approximately 33-37 for the S&P 500 in 2024-2025. The long-run historical average CAPE is approximately 17. By this measure, US equities are approximately twice as expensive as historical norms.

This does not mean a crash is imminent. CAPE has been above its historical average for most of the post-1990 period, partly because structural changes (interest rates, accounting, market composition) have permanently shifted the "normal" range. But it does mean that investors should expect more modest forward returns from current valuation levels.

Empirical research consistently shows that starting CAPE is a significant predictor of 10-year forward returns: when CAPE is very high, 10-year subsequent returns tend to be lower; when CAPE is very low (as it was in 2009), subsequent returns tend to be very high. This does not help with short-term timing but is highly relevant to long-term return expectations.

Forward P/E (the ratio of current share price to expected earnings over the next 12 months) was approximately 20-22x for the S&P 500 in early 2026, compared to approximately 15-16x for European markets and 12-14x for the MSCI World ex-US. The US premium is historically wide.

The AI earnings story

The AI investment narrative has dominated US equity markets since ChatGPT's launch in late 2022 and Nvidia's emergence as the defining beneficiary. The question for 2026 is whether AI capital expenditure translates into broad earnings growth across the economy, or whether the returns accrue primarily to a small number of companies.

Nvidia's extraordinary run: Nvidia's data centre revenues grew from approximately $15 billion in FY2023 to over $115 billion in FY2025, driven by AI chip demand from hyperscalers (Microsoft, Amazon, Alphabet, Meta). This genuine earnings growth justified much of Nvidia's remarkable share price appreciation. Whether this trajectory continues depends on AI capex budgets, chip supply dynamics, and competitive pressure from AMD, Intel, and custom silicon.

Hyperscaler AI capex: The "Magnificent 4" hyperscalers (Microsoft, Amazon, Alphabet, Meta) collectively announced AI infrastructure spending in excess of $200 billion for 2025. This spending flows to Nvidia, TSMC, semiconductor equipment makers, cooling companies, and data centre construction firms. The earnings upgrades for these suppliers are real.

The productivity dividend: The more contested question is whether AI investment generates economy-wide productivity improvements that lift earnings across non-tech sectors. Evidence of AI-driven productivity gains in healthcare, financial services, legal, and software development is accumulating, but the earnings impact is diffuse and difficult to quantify in 2026.

The capex-to-revenue gap: Some analysts have raised concerns about the gap between AI capital expenditure and AI-generated revenue at the application layer. If AI revenue growth disappoints relative to the investment levels, tech earnings could come under pressure.

Currency considerations for international investors

For UK or European investors investing in US equities, the USD/GBP or USD/EUR dynamic is a significant variable alongside the equity return.

When the dollar strengthens (as it did from 2021 to 2023 on the back of Federal Reserve rate hikes), UK investors in unhedged US equity funds benefit — their USD returns translate into more GBP when converted.

When the dollar weakens (as purchasing-power-parity models suggest it eventually will, given perceived overvaluation), UK investors in unhedged US equity funds suffer a currency headwind that reduces returns even if the underlying US equity market performs well.

Currency-hedged US equity ETFs remove this uncertainty but typically cost 0.2-0.5% in additional expense, reflecting the cost of the hedging overlay.

For long-term investors, the currency effect tends to moderate as exchange rates mean-revert. For shorter-term investors or those sensitive to year-to-year income volatility, the currency dimension of US equity investing warrants attention.

The case for geographic diversification

Fifteen years of US equity outperformance has made the implicit question harder to pose: should international investors reduce their US equity concentration?

The valuation case for diversification is clear: non-US developed markets (Europe, Japan, UK) trade at significant CAPE discounts to the US. Emerging markets are even cheaper. If valuations eventually normalise, non-US markets would outperform significantly.

The counterargument is that US structural advantages justify a premium, and that investors who have called for US underperformance based on high valuations have been wrong for 15 years.

Our view is that the case for some geographic diversification is sound, not because US equities will necessarily fall but because:

1. A 60-70% concentration in any single market is extreme concentration by any measure.
2. Non-US markets offer genuine structural opportunities (Japan corporate reform, European quality companies, India demographics) that are not replicated by US holdings.
3. Valuation discipline — buying cheaper assets when available — has a long-run empirical basis.

A practical approach: maintain meaningful US equity exposure (perhaps 40-50% of equities rather than 65-70% market-cap weight), with deliberate non-US allocations to Europe, Japan, and selected emerging markets.

How Global Investments can help

Our investment advisers can help you assess your current US equity concentration, understand the currency implications of your US holdings, and consider whether deliberate geographic diversification is appropriate for your portfolio. We can also help you navigate the active versus passive question in US equities — including the merits of equal-weight versus market-cap-weighted US equity exposure. Past performance is not a guide to future results; equity investments can fall as well as rise. Contact us to discuss your international equity strategy.