After years of heavily concentrating on large U.S. technology stocks, Wall Street investors are accelerating their shift of capital toward international markets. This change is driven by high valuations in U.S. equities, a weaker U.S. dollar, and emerging opportunities abroad, as investors bet that the leadership gap of the American market will narrow.

Fund flow data indicates this trend is gaining momentum. According to a Monday report, Morningstar Direct data shows investors poured a net $51.6 billion into international equity ETFs in January, a significant increase in monthly inflows since the end of 2024.

Several global indices have already outperformed major U.S. benchmarks this year, including the Europe Stoxx 600, South Korea's KOSPI, and the MSCI Emerging Markets Index. Last year, the MSCI All Country World Index ex-U.S. surged 29% in U.S. dollar terms, its best performance in over a decade and far exceeding the S&P 500's 16% gain.

This wave of capital outflow differs from the "de-allocate America" trade seen last spring. Most asset managers still believe the U.S. will lead global equity gains, though its margin of leadership may not be as wide as in recent years.

Valuation and the Dollar Drive Outflows High valuations and a depreciating dollar are core factors pushing capital overseas. The dollar has fallen approximately 10% from its 2022 peak, enhancing the returns of foreign stocks by boosting the earnings value of non-U.S. companies relative to their American counterparts.

"We are now in a global bull market; this is no longer just a U.S. story," said Keith Lerner, Chief Investment Officer at Truist Advisory Services.

Alex Guiliano, CIO of Resonate Wealth Partners in New Jersey, has increased allocations to European and Japanese stocks this year, partly attracted by lower valuations. "It feels like we've passed an inflection point," he said. "There seem to be many ways to win in international markets."

Michael Rosen, CIO at Angeles Investments, concentrated his portfolio on the largest U.S. tech stocks for much of the past decade but has shifted capital over the past year toward global small-cap and value stocks, focusing on Europe and China. "For us, this is a very significant shift," Rosen stated.

Catalysts Emerge in Overseas Markets Investor optimism is bolstered by several developments abroad, ranging from fiscal stimulus in Japan to a surge in military spending in Europe. On Monday, Japan's Nikkei 225 hit a new high following Prime Minister Takaichi Sanae's victory in a snap parliamentary election.

Some traders are simply seeking better deals than expensive domestic stocks. Others aim to diversify away from major domestic indices dominated by a handful of tech giants.

Don Calcagni, CIO of Mercer Advisors, noted that while he still considers the U.S. "exceptional," there are concerns about its market's future, including the growing national debt and political and economic volatility associated with President Trump.

"There is compelling evidence—not necessarily to de-allocate from the U.S.—but to begin rebalancing allocations outside the U.S., adopting a more balanced approach," he said.

Difference from the "De-Allocate America" Trade Asset managers are quick to point out that the recent wave of foreign stock buying is not a repeat of last spring's "de-allocate America" trade. Back then, global investors sold U.S. stocks, Treasuries, and other dollar-denominated assets, causing the dollar to plummet during tariff turmoil.

"If the 'de-allocate America' trade could give me a 16% return, I'd do it all the time," Calcagni said, referencing the S&P 500's double-digit gain last year. "We still think the U.S. is exceptional."

Despite recent pressure on tech stocks weighing on the market, U.S. equities hit new highs last week, with the Dow Jones Industrial Average breaking through the 50,000 level for the first time.

Investors have also been rotating away from domestic market leaders for some time. After three consecutive years of stunning returns for U.S. stocks—driven largely by the AI investment boom—traders are looking elsewhere for the next wave of gains. Foreign stocks aren't the only beneficiaries: small-cap and blue-chip stocks have also outperformed major benchmarks in recent weeks.

Calcagni observed that investor focus on the U.S. market is broadening. "Many of our clients are now asking us why they don't own more foreign stocks," he said. "Investors may have found a new faith in international diversification."