Investors, like everyone else, can be guilty of overconfidence. One common misstep is attempting to extrapolate from the recent past to predict far into the future with certainty, a phenomenon that is oftentimes labeled “recency bias.” Yet, over the long term, history has proven this to be a fallible strategy, time and again.

In fact, the current market environment reflects a number of circumstances that investors appear content to view as actuality. For example, markets appear to have fully adopted the idea of an economic soft landing, implying that recent, stronger-than-expected economic data is likely to persist. They have also accepted the notion that the Federal Reserve (Fed) and other global central banks are nearing the start of a rate cutting cycle that will lead to easier financial conditions. The combination of expectations for a soft landing and future rate cuts has helped push global equity prices higher — leading to new all-time highs during the first quarter of 2024 for the S&P 500®, Nasdaq-100 and Dow Jones Industrial Average. The valuation backdrop also keeps climbing. In fact, the S&P 500 hit 21.0 times (x) next-12-month earnings earlier this year — a high over the past 12 months. This means investors are willing to pay above-average prices for future earnings, a strategy that assumes the future continues on the current path.

Another prevalent assumption is the continued dominance of U.S. equity market performance compared to non-U.S. equities. While U.S. equities have outperformed their international counterparts for more than a decade, we believe there is ample support to include international equity allocations in a fully diversified portfolio. In this edition of Strategy Insights, we review evidence from the recent past that has caused investors to shy away from international allocations and provide perspective on our portfolio positioning. Importantly, we also highlight what would cause us to revisit our allocations. Change is the only constant, and the future cannot be predicted with absolute certainty; thus, we rely on our investment process to help us navigate financial markets with a long-term lens.

Strategy Insights Second Quarter 2024