US stocks’ huge surge since the global financial crisis means they account for almost two-thirds of the world’s investable market, raising concerns about whether such dominance creates too much risk for investors’ portfolios.
Wall Street has raced ahead of international rivals over the past decade and a half, driven largely by a rally in the tech sector — and particularly companies linked to artificial intelligence — which is now worth almost as much as all the stocks in Europe combined.
But a recent pullback in tech shares has underlined the growing nervousness around soaring valuations in a market that has swallowed an ever larger share of global investors’ allocations.
“If you hold a global tracker then by definition two-thirds of that is the US, and a lot of that is in Silicon Valley specifically,” said Paul Marsh, a professor of finance at London Business School who has spent the past 25 years tracking long-run investment returns.
“That means you’re very vulnerable to this huge bet on AI.”
Consistent returns have helped the US stock market balloon in size since 2010, with the country’s share of global free-float market capitalisation climbing from about 40 per cent in the aftermath of the global financial crisis to more than 64 per cent by 2025.
The US has held the title of the world’s largest stock market for much of the past century, having edged ahead of the UK — the dominant market during the 19th century — by the early 1900s.
By its peak in the late 1960s, the US made up more than 70 per cent of the global investable market, according to the UBS Global Investment Returns Yearbook.
This high point was driven by America’s booming postwar economy, but also a relative lack of competition: most of today’s “emerging markets” were yet to develop significant stock markets.
But the global crash of 1973-74 hit the US particularly hard. Wall Street stocks did not climb back to its late 1960s peak for more than 20 years, according to Brunel University professor of banking and finance E Philip Davis.
This decline allowed a new global leader to emerge, albeit briefly: Japan became the only country in the past century to surpass the US as the world’s largest stock market. The shift arose at the height of the late 1980s Japanese asset price bubble, which later burst.
The end of this speculative mania left foreign and domestic investors deeply sceptical about Japan’s equity markets, and its economy lay stagnant for decades. It was not until last year that the benchmark Nikkei 225 broke beyond its bubble-era peak.
“Every now and then, finance goes off the rails and that happened in Japan. People get overenthusiastic, everybody feels rich, but then it turns out to be a house of cards,” said Richard Sylla, professor emeritus of economics at NYU Stern School of Business.
Parallels between today’s stock market and these historical crashes are making some investors uneasy.
“The number one question I get asked at the moment is around what to do about the US stock market. That’s come up in every single conversation I’ve had this year,” said Duncan Lamont, head of strategic research at UK fund manager Schroders.
However, the “striking persistence” of US equity market’s performance since 2008 makes it difficult to push against the trend, because “naysayers have been wrong many times over”, he said.
The S&P 500 index has delivered average annual returns of about 14 per cent since 2010, outstripping all other major national benchmarks. That performance was bolstered by gains of more than 20 per cent in both 2023 and 2024, as excitement about AI pushed US-listed megacap technology stocks, such as chipmaker Nvidia, to record highs.
The start of 2025 has brought a rare bout of Wall Street underperformance, as relatively unloved European markets play catch-up.
US dominance is also a consequence of foreign companies, particularly in the tech sector, choosing to list in New York in search of higher valuations.
Some investors argue this trend has brought many of the world’s best companies to the US and will make the market more resilient to an economic downturn.
“I can pretty much build a global portfolio just relying on US markets,” said Jack Ablin, chief investment officer at private investment firm Cresset Capital.
But, for others, it is not just the outsize role of the US market but also its concentration in a small number of stocks that is fraying nerves. In particular, sceptics point to the huge gains of many Silicon Valley giants, which Torsten Sløk, chief economist at private capital group Apollo, said had become “ridiculously overvalued”.
The Magnificent Seven group of giant technology stocks — Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla — hold almost a third of the S&P 500’s $51.8tn market value, while the index’s cyclically adjusted price-to-earnings ratio, a measure of valuation, is approaching its highest level since the early 2000s.
“Periods come and go where bubbles start to form. And we are in a bubble today in the US, and a bubble in the tech world,” said Sløk.
Bullish investors argue that Big Tech’s strong earnings growth and AI’s potential to spur productivity justify the lofty valuations of many of the world’s largest companies. Bearish commentators, meanwhile, draw comparisons between today’s market and the dotcom bubble that burst at the beginning of the millennium.
Investor confidence was shaken in January when China’s DeepSeek unveiled AI advances apparently achieved using far less computing power than US tech groups, casting doubt on the need for the vast capital expenditures made by Magnificent Seven companies.
This month, renewed jitters have hit the tech sector, pulling the US market back slightly from all-time highs.
This is not the first time that one sector has overwhelmed Wall Street. In the 1800s, railroad companies’ hunger for investment played a central role in the early development of the US stock market. By 1900, they represented more than 60 per cent of market value.
“Artificial intelligence is the wave of the future right now, but a hundred years ago the wave of the future was rail companies. Then we had a wave of everybody buying electricity companies,” said Stern’s Sylla.
The relative decline of a dominant industry is not necessarily bad news for investors. An investor who held railroad shares since 1900 would have outperformed the broader US market, according to research by Marsh in 2015. That is despite the fact that railroads’ overall share of the market declined as companies from a plethora of other industries joined.
Even so, today’s tech dominance — and US dominance — has left many investors nervous that even a portfolio tracking a broad spread of global shares leaves them with too many eggs in one basket.
“The bottom line is that if I open page one in my finance textbook, it says that I should diversify,” said Sløk.
“People are looking at their holdings . . . and asking a very, very fundamental question, namely: ‘Am I diversified?’ And the answer today to that question is a very, very clear no.”