This strategist's theory of relativity says it's time to be underweight U.S. stocks

Ned Davis Research (NDR) has downgraded U.S. equities to underweight and upgraded Japan to overweight, while increasing exposure to emerging markets, citing deteriorating relative performance of U.S. stocks. Global Chief Strategist Tim Hayes notes that despite U.S. market gains, the U.S. has underperformed the MSCI All-Country World Index, with MSCI EM gaining 25% and MSCI Japan showing recent strong momentum, triggering sell signals for U.S. equities in NDR's models. This strategic shift is further supported by more favorable valuations in EM, currency strength in EM, and yen weakness benefiting Japanese equities, with NDR's composite models indicating continued U.S. underperformance and outperformance by EM and Japan.

Analysis

Ned Davis Research (NDR) has initiated a significant strategic shift, downgrading U.S. equities to underweight while upgrading Japan to overweight and increasing exposure to Emerging Markets (EM). This re-allocation is primarily driven by the deteriorating relative performance of U.S. stocks, which have underperformed the MSCI All-Country World Index year-to-date and over the past 21 days, despite the S&P 500 and Nasdaq Composite posting absolute gains of 14.6% and 18.8% respectively in 2025.

The rationale for favoring EM and Japan stems from their superior performance and more attractive fundamentals. The MSCI Emerging Markets index has advanced 25% in 2025, significantly outpacing the MSCI U.S. index's 14% gain, supported by "far better" valuations and improving currency strength. Similarly, the MSCI Japan index has shown strong recent momentum, gaining 4% over the last 21 days, benefiting from yen weakness and reaching a 15-month high in its relative strength line, with 86% of NDR's indicators bullish.

NDR's equity modeling has triggered a sell signal for U.S. stocks based on relative strength, contrasting with buy signals for EM and Japan. The firm notes U.S. equities are the most expensive regionally and have seen outflows, while EM has attracted inflows. This composite model suggests a continuation of U.S. underperformance and outperformance by EM and Japan, despite the unknown duration of these trends.

Key Decisions for Investors

• Investors should consider rebalancing portfolios by reducing exposure to U.S. equities and increasing allocations to Japan and Emerging Markets, aligning with Ned Davis Research's strategic downgrade of the U.S. and upgrades for the other regions.
• It is prudent to monitor key indicators such as relative performance trends, valuation differentials, and currency movements, particularly yen weakness and EM currency strength, as these factors underpin the current outperformance thesis.
• Evaluate specific investment vehicles like the iShares MSCI Emerging Markets (EEM) and iShares MSCI Japan (EWJ) ETFs for targeted exposure, while remaining cognizant of potential risks like the execution of structural reforms in Japan and the inherent uncertainty regarding the duration of these market trends.