$20bn Shift Highlights Differences in Developed Market Equities

• Early 2026’s flows into non-US developed markets equities offer a reminder of their distinct characteristics
• Asian and European equities have far more diversified sector exposures and lower valuations
• It’s impossible to predict whether the flows will continue, but they have highlighted the choice on offer

With a Middle East crisis jolting financial markets, it’s easy to forget that a historic rotation out of US equities appeared to begin in the first two months of 2026. After more than a decade of US equity dominance, Asian and European developed market equities made a comeback.

As investors sold expensive US equities, they poured money into non-US stocks. Notably, European ETFs enjoyed some of their highest ever inflows in February, counting two consecutive weeks of about $10bn, according to EPFR, which tracks ETF and mutual fund flows.

This rotation highlighted the fundamental choice in global equity markets. The story of US exceptionalism – a belief in the unique nature and superiority of the US economy – has driven US equities’ outperformance for so long that they dominate global equities. That means US Tech stocks overshadow global indices and raise average valuations.

Strip out US stocks, though, and investors have a choice that’s quite different. Non-US developed markets offer greater balance across sectors like Financials, Healthcare and Industrials. What’s more, they trade at far lower valuations.

Early 2026’s investor flows recognized the differences offered by developed markets in Europe and in Asia, where Japan rose strongly. This happened at a time when data reported in January showed Germany’s economy recovering modestly in 2025 and fears mounted of an AI stock bubble in the US.

Differing Regional and Sector Exposures

It’s informative to examine the differences between global developed market equity indices that include and exclude the United States. Doing so reveals the stark contrasts.

The Morningstar Developed Markets Index has a 73.0% exposure to the Americas, with just 17.1% in Greater Europe and 9.9% in Greater Asia. That results in the index having many of the characteristics of US equities, especially the giant technology companies.

Source: Morningstar. February 2026. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see index definitions and other important disclosures at the end of this content.

Turning to sectors, the Morningstar Developed Markets Index has a huge 24.7% in Information Technology, with its second highest allocation to Financials, at 16.7%, and third highest in Industrials, at 12.6%. For comparison, stripped of US stocks the Morningstar Developed Markets ex-US Index, is more diversified. Its largest exposure is to Financials, at 25.0%. Industrials follow, at 19.0%, and Healthcare, at 9.3%. Information Technology accounts for just 8.4%.

Source: Morningstar. February 2026. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see index definitions and other important disclosures at the end of this content.

Contrasting Valuations

Removing the US also results in lower valuations. At the end of February, for instance, the broad Morningstar Developed Markets Index was trading at an average of 23.4 times company earnings – judged by the price/earnings (p/e) ratio benchmark valuation. The ex-US version of the index had a p/e of just 18.2.

P/E Ratio

Source: Morningstar. February 2026. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see index definitions and other important disclosures at the end of this content.

In a further difference, the broad Morningstar Developed Markets Index has a low dividend yield, reflecting the fact that US companies pay out far lower dividends than they once did, often preferring to buy back shares. By contrast, the dividend culture is alive and well in Europe, while growing in Japan.

Dividend Yield

Source: Morningstar. February 2026. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see index definitions and other important disclosures at the end of this content.

Investors’ rotation out of the US into Asia and Europe left global indices that included the US lagging in early 2026. The Morningstar Developed Markets Index was up 3.64% by the end of February. Meanwhile, the index without US equities was up a greater 10.33%.

Source: Morningstar. February 2026. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see index definitions and other important disclosures at the end of this content.

A Choice Worth Having

Whether the revival of non-US stocks will continue for the rest of 2026 is hard to say, especially given the possibility of continuing geopolitical turbulence. But the beginning of the year shows that investors are alive to the choice on offer.

A developed market index without US stocks provides greater diversification across all sectors and less expensive valuations. For those investors growing wary of the AI theme and unpredictability in US policy making, that’s a choice worth having.