MW Signs of a 'great rotation' are gripping global markets - and U.S. stocks and bonds are the big losers

By Joseph Adinolfi

Fund flows over the past three months suggest a shift away from U.S. assets that can't be entirely blamed on a weakening dollar: SocGen

It's been no secret that international stocks have dramatically outperformed their peers stateside so far in 2025.

The sudden shift in market leadership has inspired a raging debt on Wall Street: Is it temporary? Or will the lagging performance of the U.S. market persist for the foreseeable future?

A look at the trend suggests it may have legs. This year's shift in positioning away from the U.S. and toward international markets has all the hallmarks of a "great rotation" that still appears to be in its early innings, according to Arthur van Slooten, a Société Générale strategist focused on tracking fund flows.

"The redirection of equity fund flows over the last three months is a clear confirmation that the great rotation has started," he said in a report shared with MarketWatch on Wednesday.

After analyzing the recent ebb and flow of capital from ETFs and mutual funds, van Slooten arrived at the following five observations.

-- Europe has been the destination of choice for investors, with direct equity inflows almost twice as high as the U.S. at $49 billion compared with $27 billion.

-- Flows into global developed-market funds were nearly twice the level of U.S. direct funds. Roughly 40% of these funds exclude U.S. stocks, meaning investors likely were seeking exposure internationally.

-- Emerging markets inflows have been making a strong comeback. Inflows stood at $23 billion, only just below those for the U.S. China accounted for nearly half of this, with China-focused funds gaining $11 billion.

-- A weakening U.S. dollar has helped drive this trend, although van Slooten said he doesn't believe dollar weakness alone was responsible for the shift. However, the softer dollar has eroded the weighting of U.S. stocks in global equity funds.

-- Finally, investors looking to invest in credit funds have recently favored Europe, despite a much larger credit market in the U.S.

The chart below illustrates the fund-flow data referenced earlier.

As van Slooten mentioned earlier, a weakening U.S. dollar has caused U.S. assets' share of their respective markets to decline. But the dollar can't be blamed for all of the shift.

To help drive his point home, van Slooten took a closer look at the value of U.S. stocks relative to their international peers. While dollar-denominated equities accounted for nearly 70% of the value of global equity funds, only 30% of fund flows over the past three months have been in their favor.

Rising geopolitical tensions between the U.S. and the rest of the world could mean the shift may be only starting, the SocGen strategist said.

The S&P 500 SPX was trading higher on Wednesday, and was up 2% year-to-date according to the latest data from FactSet. Meanwhile, the iShares Europe ETF IEV, which translates the performance of European stocks into dollars, was sitting on a nearly 19% gain. It was also trading higher on Wednesday.

-Joseph Adinolfi

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June 18, 2025 12:45 ET (16:45 GMT)

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