“The U.S. Stock Market is having one of the worst starts to the year in history,” reads the opening line of a post by Global Markets Investor this morning.
It’s counterintuitive, but “the S&P 500 is underperforming the rest of the world equities by 8 percentage points, the worst start to a year in at least 17 years.
Alternatively, “the MSCI All-Country World ex-US index rallied +8% year-to-date, while the S&P 500 is flat.”
For nearly two decades, buying U.S. large-cap growth felt like owning the house in a casino that never closed. You could leave the table, come back after dinner, and the chips would still be stacked in your favor.
Now, when you get back, the table will have been turned, and you have a tough time recognizing the table at all.
Global Money Is Moving First
MSCI Emerging Markets Latin America has climbed nearly 21%, already exceeding last year’s U.S. performance.
This morning, the U.S. market ranked 69th out of 92 tracked indexes. International equity funds have absorbed $104 billion in net inflows this year — four times the $25 billion that moved into U.S. funds.
In January alone, international ETFs drew $51.6 billion, roughly one-third of global inflows despite representing just 15% of ETF assets.
The U.S.-to-international equity ratio rolled over in November 2024. Since then, emerging markets have returned 48% while the S&P 500 gained 16%. This year, emerging markets are up 12%, their strongest opening in fourteen years. Capital has already been reallocating.
Leadership Fractures at Home
Within the U.S., large-cap growth peaked relative to small-cap value in November 2025 and has since fallen to a two-year low. The last comparable reversal occurred in March 2000. After that peak, small-cap value outperformed for more than five years.
Technology stocks have dropped sharply relative to the broader market in recent months — the steepest relative move since the Dot-Com unwind. Tech’s weight in the S&P 500 has slipped three to four percentage points. Defensive sectors — utilities, staples, health care — are picking up the slack.
The S&P 500 forward P/E sits near 27x, its richest sustained level since 2000 outside the 2020 liquidity spike.
The Shiller CAPE reached 41x. Historically, when valuations reached these levels, subsequent 10-year annualized returns averaged-1%. After inflation, real returns were lower.
The top 10 stocks now comprise 40% of the index — more concentrated than at the peak of the Dot-Com bubble.
The top 10 stocks in the S&P 500 now account for nearly 42% of the market cap, more than doubling since 2015. (Source: TEMA ETFs)
The largest stock, Nvidia, outweighs the 75th percentile stock in market cap by roughly 770 times, a ratio exceeding late-1920s readings. Concentration magnifies outcomes.
“You have to treat the market like a lawyer in a civil case and look at the preponderance of the evidence,” noted our Portfolio Director, Andrew Packer, to members of the Grey Swan Trading Fraternity last week. “It’s hard for the market as a whole to break to new highs with Big Tech weakness.”
Mr. Packer has been looking at some oversold tech opportunities, but has been focused on where the market has been showing the love right now – resource stocks – as well as making a market hedge trade.
The IPO Question
Late-cycle markets often seek new listings. Jeremy Grantham argued that a wave of megacap IPOs — OpenAI, Anthropic, possibly SpaceX — could expand market capitalization enough to pressure forward returns.
GMO’s data suggests that a 1% increase in total market cap driven by IPO issuance, historically corresponds with a 7.5% reduction in subsequent 12-month returns. With the U.S. market cap near $50 trillion, that implies roughly $500 billion in new supply.
Heavy issuance absorbs liquidity.
On Grey Swan Live! today, Matt Milner described the private-market risk curve before IPO — dilution, hype compression, sovereign capital participation. When wealth managers fund new listings, they trim existing holdings.
War With Iran? Answer: “Within Ten Days”
President Trump said this morning that the White House expects an answer “within ten days” on whether the U.S. will go to war with Iran.
As Swan Dive showed yesterday, dozens of refueling tankers are airborne.
Two carrier strike groups are positioned. Fifty additional fighter jets have moved into the theater. The New York Times and CNN reported readiness for potential strikes, though no final decision has been announced. Diplomatic channels remain open.
Brent crude trades above $64. Energy prices adjust quickly to force projection.
Defense technology firms such as Anduril, already testing drone systems in Ukraine, would likely see procurement acceleration if the conflict expands. War shifts contract flows, logistics budgets, and metal demand.
Morgan Stanley’s Furrowed Brow
Morgan Stanley noted this morning that the S&P 500 has remained below 7,000 and the Nasdaq sits below its October 2025 high. The headline note to their traders and money managers this morning read: “When Good News Is Bad News, Again.”
In short, while economic indicators have improved…. manufacturing data has beaten expectations…. the February 11 jobs report showed resilience… and fourth-quarter earnings generally exceeded forecasts… indexes have not broken higher.
Now, investors want evidence that AI capital expenditures convert into durable returns.
Equal-weight indexes have outperformed cap-weighted indexes year-to-date. Cheaper cash-flow companies have outperformed high-multiple growth names. Retail activity surged in January, often funded by trimming mega-cap tech.
Morgan Stanley suggests emphasizing earnings achievability, taking profits in speculative small caps, broadening exposure toward AI adopters in health care, energy, software, and financials, and maintaining exposure to emerging markets, gold, infrastructure, and select alternatives.
If these are the instructions the sell-side analysts are getting from one of Wall Street’s biggest firms, at the very least, you should be aware…
The High Concentration At the Top Hides The Actual Trend
According to Global Markets Investor, U.S. dominance peaked in late 2024. The relative line has trended downward for fifteen months. Leadership has dispersed. Even though we’ve been writing about the alarming, historic, high concentration in the Mag 7 at the very top of the indexes, large amounts of capital moved before the financial media headlines caught up.
“Nobody rings a bell at the top,” the old timers will tell you.
In trader speak: “Markets do not announce leadership changes.”
When the largest names carry 40% of the index, and the rest of the world begins to gain ground, balance shifts gradually, then decisively.
You don’t have to forecast which region wins next. You watch where capital settles and where it drains.
As an attendee to the Rick Rule Investment Symposium suggested to me while in line for food one year, “if the boat starts leaning, you don’t argue with the river. Adjust your footing on the deck and keep a strong hand on the keel.”
~ Addison
P.S. We suspect that as one of the mega-IPOs – SpaceX, OpenAI, Anthropic or Anduril – launches this year, the huge sucking sound you will hear is money managers on Wall Street pulling money out of the well-established names in the Mag 7 at the top of the indexes and diving into speculative assets with both hands (and arms) outstretched in front of them.
We did a comprehensive review of the pre-IPO space with Private Market Profits’ Matt Milner on an early Grey Swan Live! today.
Be sure to catch the replay when we get it posted to videos on the members’ section of the Grey Swan Investment Fraternity website.
