The era of diversification has begun. Goldman says it has further to run.

Goldman Sachs strategists are now advising institutional investors to diversify globally, signaling an end to the prolonged U.S. equity outperformance trend that followed the 2008 financial crisis. This strategic shift is prompted by moderating U.S. exceptionalism, a narrowing earnings growth gap, a 10% depreciation of the dollar with further declines anticipated, and the increasing attractiveness of overseas markets due to factors like a resilient Chinese economy and German fiscal policy changes. While global portfolios still exhibit high concentration risk, Goldman notes nascent diversification, with non-U.S. small/mid-caps and value sectors like European banks beginning to outperform, indicating a new phase for multi-asset portfolio construction where past trends should not be extrapolated indefinitely.

Analysis

Goldman Sachs strategists are signaling a structural shift in global asset allocation, moving away from the U.S.-centric dominance that has characterized markets since the 2008 financial crisis. This 'diversify to amplify' thesis, initiated in October 2024, is gaining traction as key economic drivers evolve. The core rationale is the moderation of U.S. exceptionalism, evidenced by a narrowing gap in relative earnings-per-share growth and return on equity compared to the rest of the world. Compounding this is a significant headwind from the U.S. dollar, which has already depreciated 10% this year, with Goldman's forex strategists anticipating further weakness driven by tariff impacts on corporate profits and rising U.S. fiscal risks. Concurrently, international markets are becoming more attractive due to a resilient Chinese economy and a pivotal shift in German fiscal policy away from its 'debt brake,' which is drawing capital to cheaper overseas assets. While global portfolios still exhibit high concentration in U.S. megacap tech, there are nascent signs of a rotation, with European banks, international small-caps, and mid-caps beginning to show outperformance, suggesting the end of the post-crisis investment paradigm.

Key Decisions for Investors

• Investors should critically review portfolio concentration in U.S. equities, especially megacap technology stocks, and consider systematically reallocating capital to non-U.S. markets to mitigate single-country risk.
• Given the U.S. dollar's 10% depreciation and projections for further declines, it is imperative to evaluate and potentially implement currency hedging strategies to protect returns on international investments.
• Explore opportunities beyond the U.S. growth theme by increasing exposure to international small and mid-cap stocks and value sectors, such as European banks, which are showing early signs of outperformance.
• Monitor the relative earnings growth gap between the U.S. and other regions, U.S. fiscal policy developments, and dollar exchange rate movements as key indicators for the pace of this strategic market shift.