Equity allocation in an era of geoeconomic fragmentation

US assets have long benefitted from virtuous feedback loops associated with the country’s twin deficits (Figure 1). These have been predicated on the resilience of the US economy, strength of its corporates, globalist policy approach of its government, and the dollar’s reserve currency status. However, emerging challenges against these key pillars hold the potential to reorientate global capital flows and challenge the narrative of US exceptionalism - at least from a capital market perspective.

We are already seeing downward pressure on the dollar, while higher inflation expectations are affecting the Fed’s willingness to act as a liquidity backstop. In turn, term premia and US borrowing costs have increased. These dynamics could spur a vicious cycle if higher interest expenses result in the government debt burden expanding faster than the economy can grow.

There is also potential for further weakening of the dollar to intensify headwinds against US assets. Amid resilient earnings, US equities have continued to attract near record inflows in 2025, despite the dollar’s decline. However, US earnings growth trends are now converging with those across large parts of Europe and Asia, creating a more level playing field for equities globally. We therefore see potential for a shift away from current US-centric positioning as aspects of US exceptionalism fade (Figure 2).

Source: Fidelity International, June 2025.

A more level playing field for equities globally means that US-centric equity positioning is less justified than it has been in the past, even if the US remains an attractive investment destination from a bottom-up perspective. Investors should therefore be considering their **geographic equity allocations.

While we continue to expect see **attractive long-term return potential for equities globally, market pricing suggests that alpha could become a more important component of overall returns. Ex-US valuation discounts have become more attractive, particularly given constructive macroeconomic developments across Europe and Asia, and especially for risk-aware global investors given the additional consideration of evolving currency dynamics.

A more discerning, differentiated approach to equity investing is therefore warranted, rather than broad passive exposure (Figure 5). However, those undertaking geographic allocation rebalancings must also consider the tracking-error implications of diverging from US-centric global indices.

Source: Fidelity International, July 2025.