There's Still No Place Like Home

RiverFront Investment Group continues to favor US equities over international, attributing US outperformance to superior earnings growth, a favorable macroeconomic environment, and a market composition dominated by growth companies benefiting from the ongoing AI theme. Despite international markets appearing undervalued, the firm believes this valuation gap is justified by stronger US profitability trends. While acknowledging potential catalysts for international outperformance—such as a shift in the AI trade, US rate cuts weakening the dollar, or increased European stimulus—RiverFront awaits clearer policy guidance and earnings confirmation before significantly increasing international exposure, maintaining an in-line allocation with a preference for European banks, Japan, and value-oriented themes, while avoiding Chinese equities.

Analysis

RiverFront maintains a preference for US equities over international, attributing outperformance to superior earnings growth and a favorable macroeconomic environment. The US market's high weighting in growth sectors, particularly technology, has capitalized on low-interest rates and the Artificial Intelligence (AI) theme, driving the S&P 500 (SPY) to significantly outearn EAFE since 2008. This stronger US profit trend justifies the current valuation premium, despite developed international equities (EAFE) being 2.1% lower than the US long-term trend.

While potential catalysts for international outperformance exist—such as a broader AI boom, US rate cuts weakening the dollar, or increased European stimulus—RiverFront remains cautious. They require significant policy clarity and earnings confirmation for these themes to become durable, noting a global AI slowdown would be broadly negative for all stocks.

Current portfolios reflect confidence in US economic strength and the AI trade, maintaining international exposure in line with global benchmarks. Preferences lean towards European banks and Japan, with Chinese equities explicitly avoided due to governmental control and US/China AI competition, pending more concrete earnings evidence for broader international shifts.

Key Decisions for Investors

• Maintain overweight exposure to US equities, particularly growth-oriented sectors and those benefiting from the AI theme, given superior earnings trends.
• Exercise caution with broad international equity allocations, awaiting clearer policy guidance and confirmed earnings growth before significant shifts.
• Consider selective international exposure to European banks and Japan, while explicitly avoiding Chinese equities due to geopolitical and governmental control risks.
• Monitor US interest rate policy and its impact on the US dollar, as sustained rate cuts could weaken the dollar and provide a tailwind for international returns.
• Watch for earnings confirmation and policy developments regarding European stimulus and the broadening of the AI trade beyond US/China as potential future catalysts.