Morgan Stanley
Wealth Management

How to Invest for the ‘Great Rebalancing’

Aug 8, 2025

After years of market dominance, U.S. equities face rising challenges. Here’s how to prepare for a global market rebalancing.

Author
Lisa Shalett
Lisa Shalett

Key Takeaways

  • U.S. stocks have substantially outperformed the rest of the world’s equities over the past 15 years, giving rise to the idea of “American Exceptionalism” in markets.
  • However, U.S. market dominance will become harder to sustain as higher interest rates, a rising federal debt burden and deglobalization could all weigh on richly-valued and highly-concentrated U.S. stock market indexes.  
  • As the global economy rebalances, investors may wish to consider a more global, value-oriented and diversified portfolio, active management and real assets.

“American Exceptionalism,” the belief among many investors that the U.S. economy and markets are fundamentally stronger than those of other global regions, has been a powerful driver of outsized U.S. equity returns for many years now.

 

In fact, since the 2007-2009 global financial crisis, U.S. equities have outpaced developed market international stocks by a stunning 430% cumulatively. This kind of dominance has led to the U.S. taking up an increasingly large share of global equity indexes. Today, U.S. stocks account for 64% of global market capitalization, despite the U.S. having just 4% of the world’s population and 25% of global gross domestic product (GDP).

 

But now, a host of challenges, such as shifting trade policies and swelling U.S. government debt, are adding uncertainty to the outlook, and many investors are asking: Is the era of American Exceptionalism ending?

 

Morgan Stanley’s Global Investment Committee does not believe it is. Nor do we think the long-running bull market in U.S. equities is doomed. However, we do see U.S. markets entering a far more challenging period of normalization and global rebalancing, with significant implications for asset allocation and portfolio construction for investors in the years ahead. 

 

Here’s a closer look at why, and what it could mean for your portfolio: 

Wealth Management

American Exceptionalism: Navigating the Great Rebalancing

U.S. market dominance in the post-GFC era has been undeniable. But “American Exceptionalism” may now be giving way to the “Great Rebalancing.” Here’s what investors should know.

U.S. Market Dominance Apt to Fade

For more than 15 years, the U.S. economy has far exceeded most global rivals in growth, productivity, the pace of innovation and corporate profitability. In financial markets, the U.S.-based mega-cap tech stocks are dominant, cash-rich and profitable, with few obvious global substitutes.

 

But history shows that such market dominance is rarely permanent. The same policy actions that supercharged U.S. financial performance since the global financial crisis are now unwinding, which will likely remove key tailwinds for U.S. markets. In particular, we see three major factors at inflection points:

  1. 1
    The end of easy monetary policy

    The extraordinary monetary policy responses to the financial crisis and the COVID-19 pandemic injected trillions of dollars into the economy and kept interest rates low. With ample money flowing through the system, financial returns were increasingly driven by rising valuation multiples, or the price investors would pay for an asset relative to its earnings, which grew increasingly disconnected from the real economy.

     

    Now, with such accommodative monetary policy unlikely to be replicated, we see rates normalizing back to higher long-term levels, likely creating a ceiling for valuations. 

  2. 2
    The rising burden of U.S. debt spending

    By injecting trillions of dollars into the economy, policymakers in Washington have helped households and businesses shore up their balance sheets over the past 15 years. However, that required immense federal spending and borrowing. As a result, the U.S. budget deficit has grown to nearly double the 80-year average and the debt-to-GDP ratio, at 120%, is near its highest level in more than 60 years, raising concerns about the long-term sustainability of U.S. government finances.

     

    With borrowing costs on the rise, interest payments now account for a greater share of federal outlays, exceeding even national defense spending. This risks crowding out any potential federal discretionary spending or fiscal stimulus during the next recession or other crises. A higher cost of capital also risks constraining private-sector investment and weighing on asset prices in financial markets. 

  3. 3
    The unravelling of globalization

    Globalization provided U.S. companies with access to low-cost labor and materials that helped reduce expenses and grow profit margins. It also allowed the U.S. to shift away from manufacturing to a profitable services- and innovation-led economy. And it provided American companies with greater access to non-U.S. markets, which currently account for more than one-third of S&P 500 profits.

     

    However, the U.S.’s current pursuit of a deglobalization-oriented policy could lead to inefficiencies, lower corporate profit margins and potentially higher inflation, while also weakening the U.S. dollar relative to other global currencies.

Investors need to be prepared for a more challenging period in which U.S. economic dominance could recede and the strength of global markets comes back into balance – what we call the “Great Rebalancing.”

Flipping Investing Dynamics

Investors need to be prepared for a more challenging period in which U.S. economic dominance could recede and the strength of global markets comes back into balance – what we call the “Great Rebalancing.” This new era will likely be characterized by higher interest rates, greater volatility and a weaker dollar, which could shift capital flows toward non-U.S. markets.

 

Think of it as the popular investing dynamic of the past 15 years getting flipped on its head – from the passive, U.S. growth-only portfolio, often enhanced by exceptional returns to private assets, to the actively-managed, global, value-oriented portfolio with more opportunities in public securities.

 

Against this backdrop, investors may consider updating portfolios to include:

  • More comprehensive sector, asset-class and regional diversification.
  • Relative value opportunities outside the U.S., including in India, Japan, Brazil and Mexico, which may benefit from efforts to shore up global supply chains.
  • Global financials and other cyclical industries like energy, materials, industrials and automation, which could benefit from a steeper yield curve and lower inflation outside the U.S.
  • Real assets and hedge funds, which may prove attractive amid potentially higher stock-specific risk, volatility and U.S. policy constraints.

 

What could these shifts mean for your portfolio? To learn more, ask your Morgan Stanley Financial Advisor for a copy of the Global Investment Committee Special Report from July 7, 2025, “American Exceptionalism: Navigating the Great Rebalancing.” Listen to an audiocast based on this report.

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Index Definitions

For index, indicator and survey definitions referenced in this report please visit the following:

https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market.  Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds.  High yield bonds should comprise only a limited portion of a balanced portfolio.

Treasury Inflation Protection Securities’ (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation.

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. 

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

Alternative investments may be either traditional alternative investment vehicles, such as hedge funds, fund of hedge funds, private equity, private real estate and managed futures or, non-traditional products such as mutual funds and exchange-traded funds that also seek alternative-like exposure but have significant differences from traditional alternative investments. The risks of traditional alternative investments may include: can be highly illiquid, speculative and not appropriate for all investors, loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification and resulting higher risk due to concentration of trading authority when a single advisor is utilized, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than open-end mutual funds, and risks associated with the operations, personnel and processes of the manager. Non-traditional alternative strategy products may employ various investment strategies and techniques for both hedging and more speculative purposes such as short-selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss. These investments are subject to the risks normally associated with debt instruments and also carry substantial additional risks. Investors could lose all or a substantial amount of their investment. These investments typically have higher fees or expenses than traditional investments.

Managed futures investments are speculative, involve a high degree of risk, use significant leverage, have limited liquidity and/or may be generally illiquid, may incur substantial charges, may subject investors to conflicts of interest, and are usually appropriate only for the risk capital portion of an investor’s portfolio. Before investing in any partnership and in order to make an informed decision, investors should read the applicable prospectus and/or offering documents carefully for additional information, including charges, expenses, and risks. Managed futures investments are not intended to replace equities or fixed income securities but rather may act as a complement to these asset categories in a diversified portfolio.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.  Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.

Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.

Artificial intelligence (AI) is subject to limitations, and you should be aware that any output from an AI-supported tool or service made available by the Firm for your use is subject to such limitations, including but not limited to inaccuracy, incompleteness, or embedded bias.  You should always verify the results of any AI-generated output.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

The indices are unmanaged. An investor cannot invest directly in an index.  They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices are not subject to expenses or fees and are often comprised of securities and other investment instruments the liquidity of which is not restricted. A particular investment product may consist of securities significantly different than those in any index referred to herein. Comparing an investment to a particular index may be of limited use.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan Stanley Wealth Management retains the right to change representative indices at any time.

Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC.

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