Investors have witnessed heightened stock market turbulence recently, with global shares around 4% lower than they were at the start of the year1. However, while US shares have taken a hit, European shares have shown resilience. So far this year, US shares are down 7% whereas European shares are up 12%2.
This reversal of fortunes underscores a crucial lesson for investors: the importance of holding a globally diversified portfolio, which spreads your money across different regions of the world. Predicting which region will outperform, and when, is very difficult, whereas diversifying your investments can help manage risk and potentially improve performance over the long term.
Why have US shares fallen recently?
The recent fall in US share prices marks a sharp reversal from last year, when they climbed to new highs after a decade of strong growth. A £100 investment in US shares 10 years ago would have grown to £402 by the end of 2024 (a 15% annualised3 return) – more than twice the final balance of £193 for an equivalent investment in global ex-US shares (a 7% annualised return)4.
Some of the reasons for the US stock market’s outperformance include strong growth in company earnings and its heavy weighting to the technology sector, which outperformed other sectors over the past decade. Additionally, share price valuations (how much investors are willing to pay for shares based on company earnings) expanded more in the US than in other developed markets over the past decade.
This year, however, US share prices have fallen. One explanation for the drop is growing uncertainty around government policy, particularly regarding trade tariffs. Moreover, expectations for US economic growth are starting to deteriorate and recent data suggest the economy will shrink in the first quarter of the year. Part of the decline in US share prices may also be because valuations are becoming less stretched.
Why have European shares risen?
Optimism towards European shares started to grow at the start of the year on hopes that the economy would start to expand again, growing expectations of greater defence spending across Europe and increased chances of a ceasefire in Ukraine.
This optimism was given a further boost on 4 March when the incoming German chancellor announced an overhaul to the country’s spending plans in an attempt to boost growth. The proposed changes include a new €500 billion infrastructure investment fund and potentially unlimited borrowing for defence spending.
As a result of all these factors, we have upgraded our forecasts for euro area economic growth in 2025 and 2026 by 0.5 and 0.6 percentage points to 1% and 1.6%, respectively. We think long-term economic growth and interest rates will be higher too.
A key risk to these higher growth expectations is the prospect of significantly higher US trade tariffs. Our calculations suggest that if the US were to implement a 25% tariff on European Union goods for an extended period, it could offset the expected gains from Germany’s spending plans in both 2025 and 2026.
What does this mean for long-term investors?
Ultimately, we believe staying diversified is key because no-one knows which region will outperform in the long term.
Over the last decade US shares were the clear winner, but this hasn’t always been the case. In fact, between 2000 and 2009, US shares underperformed, with an annualised return of -1% compared with 4% for global ex-US shares. And this was at a time when there were high expectations for the internet to transform the economy.
Ultimately, it is difficult to know which region will outperform over long periods, and when. In our view, for many investors, holding a well-diversified portfolio is most appropriate. By spreading your money across different types of investments, such as shares and bonds5, as well as different industries and regions of the world, you can protect your portfolio from unnecessarily large losses, while also enjoying solid returns over time.
The bottom line is to keep perspective, focus on the long term and consider building and maintaining a balanced portfolio that reflects your goals and attitude to risk.
1 Returns based on the MSCI World Index denominated in GBP as at 14 March 2025.
2 Returns based on the MSCI USA Index for US shares and the MSCI EMU Index for European shares, denominated in GBP as at 14 March 2025.
3 Annualised returns show what an investor would earn over a period of time if the annual return was compounded (i.e. the investor earns a return on their return as well as the original capital).
4 Returns are based on our calculations using MSCI indices denominated in GBP over 10 years to 31 December 2024.
5 Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Past performance is not a reliable indicator of future results.
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