End of US Stock Dominance? Goldman Sachs: Diversified Investing Returns as Capital Shifts to Japan, Asia-Pacific, and Emerging Markets

The long-standing dominance of U.S. equities is showing signs of weakening. In a recently released strategy report, Peter Oppenheimer, Goldman Sachs' Chief Global Equity Strategist, stated that global stock markets are entering a 'healthy normalization' phase, where capital allocation is no longer concentrated in a single market or sector, and the value of diversified investment is gradually reemerging.

Oppenheimer observed that since the beginning of 2025, this 'great dispersion' trend has accelerated significantly. The U.S., once seen as the engine of global stock markets, has instead lagged behind major markets; in contrast, Japan, Asia-Pacific, and emerging markets have led in terms of local currency returns.

The key driver behind this sector rotation lies in the massive capital expenditures by tech giants in recent years, which are gradually eroding their free cash flow yields, forcing the market to reassess the valuation premium of technology stocks.

At the same time, the spillover effects of this capital spending boom are revitalizing traditional sectors such as industrials, boosting both growth prospects and valuation multiples.

In the report, Oppenheimer emphasized a crucial point: this rotation is not driven by valuation inflation or rate cut expectations, but by solid earnings performance underpinning the market rally.

He believes that after more than a decade of extreme concentration in both market capitalization and earnings among a few stocks, the market is now approaching a structural turning point, and the opportunity for investors to generate excess returns through genuine diversification is quietly increasing.

Are Tech Stocks Losing Their Shine? Capital Expenditure Eroding Cash Flow Advantage

Looking back at the more than ten years since the financial crisis, the technology sector secured its position as the global investor favorite by leveraging its asset-light business model, explosive growth in cloud and software demand, and valuation premiums supported by a zero-interest-rate environment, consistently driving up profit margins and return on equity.

However, the AI arms race ignited by the launch of ChatGPT has fundamentally changed the game.

Oppenheimer pointed out that mega-cap tech companies, in their race to dominate the AI landscape, have launched an unprecedented capital expenditure competition. This 'super cycle' is fundamentally undermining the financial strength that the tech industry once prided itself on, as massive investments continue to consume free cash flow, forcing these companies to turn to debt and equity markets for funding.

When measured by free cash flow yield, U.S. equities—long supported by tech giants—have seen their advantage over value-oriented markets like Europe clearly narrow. This is the fundamental reason behind the recent shift in relative market performance.

Additionally, rising government debt, persistent inflationary pressures, and increased government bond supply have driven up funding costs, making earnings growth once again the primary engine of stock market returns.

Traditional Sectors Revalued: Earnings Are What Matter

Notably, this market dispersion is not built on speculation but on solid earnings fundamentals.

Oppenheimer emphasized that not only are earnings performances strong, but analysts' earnings forecast revisions are also consistently moving upward, providing a dual validation of market fundamentals.

The massive capital expenditures by mega-cap tech firms and chipmakers, combined with increased fiscal spending by governments worldwide on energy security, critical infrastructure, and defense, have jointly fueled this super cycle of capital spending.

The resulting spillover effects have brought long-neglected traditional sectors like industrials back into the spotlight, with both growth outlooks and valuations receiving a simultaneous boost.

From a regional perspective, return on equity remains broadly high across markets, stock correlations are declining, and as leadership rotates across sectors, the opportunity to generate alpha through stock selection is expanding.

Oppenheimer noted that although the overall P/E ratio of U.S. equities has declined due to underperformance in tech stocks, from the perspective of return on equity, the U.S. market remains the most attractive globally.

Concentration Peaks, Diversification Returns to Center Stage

Goldman Sachs believes that declining stock correlations, coupled with the rapid collapse of momentum strategies, are accelerating a reshuffling of market leadership and creating a more favorable environment for investors to pick high-quality growth stocks and create value.

Oppenheimer's core argument is that after over a decade of extreme concentration in both market cap and earnings, global equity markets are undergoing a healthy normalization correction, and diversified portfolios are finally regaining tangible returns. He expects this trend to continue evolving.

The analysis suggests that for investors, the cost-benefit ratio of the previous 'all-in on U.S. tech giants' strategy is declining. In its place, a balanced, cross-regional and cross-sector allocation logic is returning to the forefront.