Key points

• There are growing signs that market leadership is widening beyond US mega‑cap technology stocks, potentially marking the start of the “great rotation”.
  
  
• While US equity valuations are still elevated compared with the rest of the world, the recent rally in markets outside the US could be a signal that the cycle is changing.
  
  
• With regional, sector and style leadership broadening, investors may benefit from exposure to more reasonably valued segments of the market.

After more than a decade of US equity market leadership, last year’s exceptional rally in global markets outside the US marked a notable shift. Now, investors are debating whether the long‑anticipated “great rotation” is finally taking shape.

Proponents of the great rotation point to accelerated investment in physical goods

Those on the “yes” side of the debate see market strength as broadening beyond mega-cap, tech-heavy US equity towards more capital-intensive industries globally. Across the world, infrastructure investment, energy security initiatives and supply‑chain reshoring are moving from planning stages to execution. This means accelerated investment in physical goods and earnings growth in sectors close to this shift.

Europe provides a clear example. Increased defence spending and accelerated investment in renewable energy are supporting multi-year demand for capital‑intensive sectors such as industrial equipment, materials and utilities. These trends favour companies with tangible assets, long‑dated cash flows and pricing power - areas that had been underrepresented in global portfolios during the asset‑light growth era. The effects are also visible in commodities markets and in emerging economies that supply key inputs for these projects.

Additionally, the investment footprint of an AI-driven capital buildout reaches well into the broad US equity market. The spending requirements associated with AI are driving demand for semiconductors, advanced manufacturing equipment and electrical equipment. Many of the key companies benefitting from this development are listed outside of the US.

AI is reshaping sector dynamics within the US too. Utility and energy companies, historically valued for income rather than growth, are seeing improved valuations as electricity demand rises and grid investment accelerates.

Proponents of the status quo see continued merit in tech-heavy US equities

Those on the “no” side of the great rotation debate see continued investing merit in tech-heavy US equities. Over extended horizons, equity returns tend to be driven by a relatively small number of highly successful firms. While these firms change over time, the US continues to be the primary incubator of such companies. Deep capital markets, a strong venture-capital ecosystem and a culture of innovation all support the creation and scaling of new technologies.

The US also benefits from institutional features that support rapid adoption of innovation. Flexible labour markets, comparatively strong corporate governance and a culture of risk-taking all increase the likelihood for productivity gains that translate into earnings growth.

Geopolitical considerations reinforce this position. The US operates as a large, relatively self‑sufficient economy with robust domestic energy and food supplies. In periods of heightened geopolitical uncertainty, as we’re currently experiencing, this insulation has tended to support capital flows into US assets and to limit relative volatility. These characteristics help explain why investors continue to assign a premium to US equities.

Valuations help inform our stance

Valuations remain central to the rotation discussion. While valuations are not a timing tool, they play a critical role in shaping outcomes as market narratives evolve. Market movements in February underscored the risks associated with stretched valuations. The sharp decline in parts of the software and IT services sector following heightened concerns about AI‑driven disruption illustrates how quickly sentiment can change due to the prospect of business model disruption. After years of strong performance and rising multiples, these stocks had little valuation cushion when narratives turned.

Attractive valuations preceded higher returns across global equity markets

Notes: This chart shows forward price/earnings ratios as of year-end 2024 based on Institutional Brokers’ Estimate System consensus earnings-per-share expectations for the S&P 500 Index to reflect the US large-cap category, Russell 2000 Index to reflect the US small-cap category, MSCI EAFE Index to reflect the developed markets ex-US category, MSCI EAFE Small Cap Index to reflect the developed markets ex-US small-cap category and MSCI Emerging Markets Index to reflect the emerging markets category. Returns are cumulative from year-end 2024 through to February 2026. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 

Sources: Vanguard calculations, using data from FactSet, as at 28 February 2026.

Whereas stretched valuations leave stocks vulnerable to a sudden business model disruption, the low expectations underlying low valuations can provide resilience - and potential upside. As shown in the chart above, many non-US companies entered 2025 with historically attractive valuations and, when sentiment improved, the more attractively valued stocks appreciated the most.

The S&P 500 Index continues to trade near the upper end of its historical valuation range, reflecting both strong earnings growth and a premium assigned to US corporate resilience. By many measures, it is a stretched valuation that requires continued earnings growth and, importantly, a lack of economic developments that call this trend into question.

In contrast, many global markets outside the US continue to trade closer to long‑run averages. Granted, the valuation gap between US and non-US equities has narrowed following last year’s rally. However, after years of US-driven equity market growth, continued optimism underlies current US valuations, whereas guardedness surrounds the equity valuations of markets outside the US. Similarly, many segments of the global equity market outside of the mega-cap tech space continue to be under-owned in global portfolios.

Global diversification adds resilience

Today’s environment looks very different from the decade-long stretch in which US large-cap growth stocks reliably and consistently outperformed, making style, market capitalisation and regional diversification seem unnecessary. Against the current backdrop, our view remains that within the equity portion of their portfolios, investors stand to benefit from broadening exposure to more reasonably valued segments across global markets. Such diversification can add resilience and enhance upside potential as rapid advances in AI, already reshaping business models and investment narratives, continue to spread through the global economy.