The Global Capital Markets Operate Under the Dominance of a Single, Dangerous Narrative: The Euphoria Over Artificial Intelligence in the United States. According to international asset managers, this boom has driven indexes to new highs and delivered extraordinary returns. However, they acknowledge that this same euphoria has sown the seeds of systemic risk, creating levels of market concentration not seen in decades.
The interdependence and high valuations of this select group of companies call for rigorous analysis and a strategic response. For this reason, investment firms argue that adopting a proactive global diversification strategy is essential for the coming year. In this regard, they maintain that it is not about abandoning the market, but about rebalancing the portfolio to mitigate the growing risks inherent in the concentration in U.S. technology, while at the same time capturing significant value opportunities emerging in other regions and asset classes.
The Reasons for Vertigo
A thorough analysis of the foundations of the current U.S. bull market is a strategically essential exercise. Asset managers agree that while the euphoria surrounding AI is partially justified by its transformative potential, it may conceal structural vulnerabilities that prudent investors cannot afford to ignore. In this sense, the data show that, since the launch of ChatGPT, only 41 AI-linked stocks account for 75% of the total gains in the S&P 500 index.
“We do not see an AI bubble, but rather a continuing AI boom that could generate significant productivity gains in the coming years,” acknowledges Benjardin Gärtner, Global Head of Equities at DWS. In his view, although setbacks may arise along the way—as with any technological revolution—the growth story appears to remain intact.
For Raphaël Thuin, Head of Capital Markets Strategies, and Nina Majstorovic, Product Specialist in Capital Markets Strategies at Tikehau Capital, the issue is that over the past decade, the profits of technology companies have grown faster than the market, thanks in particular to online advertising, artificial intelligence, and the cloud. They note that Nvidia’s latest results are a perfect example of this and confirm the strength of the AI cycle.
“Nonetheless, doubts remain about the sustainability of demand, visibility beyond the coming quarters, and the quality of the order backlog. The market is debating a possible marginal slowdown in innovation and still uneven return on investment (ROI). Lastly, the circularity of financing, the increased use of debt (including private debt), and the energy constraints required for mass deployment are fueling some mistrust toward the sector,” they explain.
However, despite these cautionary points, they consider AI to remain a structural megatrend. “Its adoption is tangible in terms of usage, and early signs of increased productivity are beginning to emerge. We believe the hyperscalers have solid balance sheets and the cash flow needed to finance the investment cycle. Therefore, it seems appropriate to maintain long-term exposure, while favoring a selective approach focused on sectors with demand visibility, pricing power, and the capacity to generate cash flow to cover investments. At the same time, it will be important to monitor the effective transformation of order books, financial discipline, investment trajectory, and access to and cost of energy,” argue the experts at Tikehau Capital.
Ideas for Diversification
When considering diversification, the experts at boutique firm Quality Growth (Vontobel) point out that value stocks outside the U.S. have matched the performance of the Nasdaq 100, often seen as the benchmark for high-growth tech companies. “Much of this global value resurgence is explained by the revaluation of cyclical sectors, especially banking. Investors are pricing in greater profit potential, improved capital return policies, and more favorable fiscal and monetary outlooks,” the firm explains.
Among their favorite assets are European banks, which have been notable beneficiaries of the current context. “For the first time since the global financial crisis, their price-to-book ratios have surpassed the 1x level—a symbolic and relevant shift in investor sentiment. While there are reasons for this, we observe that since 2024 European value stocks have increased their multiples, while European growth and quality companies have not. Therefore, we now identify significant opportunities in Europe among high-quality growth companies, particularly those with strong fundamentals and resilient business models,” they add.
At Janus Henderson, they argue that global equity investors should take Europe into account. “Excluding the United Kingdom, Europe is the second-largest component of the MSCI All Country World Index, behind the United States, and is often underweighted in portfolios. Although the EU’s planned initiatives may not achieve the additional 19.6% increase in total European GDP forecasted, the ambition clearly marks a break with the austerity era, with governments now actively investing in growth and security,” they state in support of the Old Continent.
In equities, from a diversification perspective, the asset manager maintains that Europe is less sector-concentrated than the U.S. and could also offer greater income-generation opportunities. “The dividend yield of the MSCI Europe Index is 3.3% compared to 1.2% for the S&P 500® Index. History shows that a higher dividend yield can translate into higher real returns. Over a five-year period, the median return of stocks with a dividend yield above 3% outperformed, on average, by a minimum of 189 basis points (bps) compared to stocks with a yield below 2%,” they argue.
Finally, Luca Paolini, Chief Strategist at Pictet AM, sees potential in European markets in domestically oriented stocks, particularly mid-caps. “Adjusted for sector composition differences, Europe trades at a 25% discount to the U.S., compared to the typical 10% before COVID and the war in Ukraine—this could be a positive surprise. European stocks may experience significant gains if just part of the promised German public spending begins to flow. High-quality companies’ stocks, after a prolonged period of low returns, are likely to resume their role of protecting portfolios during periods of market volatility, against adverse macroeconomic or geopolitical surprises,” says Paolini.
When discussing sectors, the Pictet AM expert considers pharmaceuticals especially promising, as most of the bad news on drug pricing has already been priced in, and the increase in mergers and acquisitions and the moderation of economic growth support unlocking significant value. “We also like technology, financials, and industrials, with strong earnings growth. In addition, the UK market offers protection against stagflation risks and an attractive dividend yield,” he adds.
