Will the Major Rotation Out of U.S. Stocks Continue?

Bernstein Predicts Continued Divergence Between U.S. and Asian Equities

According to Bernstein, the sharp divergence between U.S. and Asian equities that began in mid-February is likely to persist. The firm argues that mounting economic uncertainty and the relative valuation advantages abroad could make the shift away from U.S. stocks more permanent.

Since the start of 2025, the S&P 500 has dropped by 8.6%, while Japan’s stock market and broader Asia (excluding Japan) have barely managed to stay in positive territory, with gains of 0.7% and 0.3% respectively.

Bernstein attributes this divergence to the growing skepticism around “U.S. exceptionalism,” intensified by tariff uncertainties that have pressured both the U.S. dollar and bond yields.

Looking ahead, Bernstein believes Asian markets will continue to outperform. Among the most attractive opportunities are Japan, India, and South Korea.

Recent fund flow data further support this trend. Although U.S. equities have attracted the most inflows in 2024 overall, the week of March 25 marked the first major outflow from U.S. stocks. During that week, Europe received $20 billion in inflows and Japan attracted $7 billion. A similar pattern was observed following the week of April 9.

However, Bernstein analysts caution: “Despite all the talk about a major rotation out of the U.S., inflows into U.S. equities still far exceed those into other regions.”

Historically, there have been 12 periods since 1989 when Asia ex-Japan outperformed the U.S. during downturns, typically lasting around four months. Japan itself has experienced similar phases over a five-month span, during which domestically focused sectors and value stocks tended to lead the gains. Bernstein expects these trends to continue.

From a valuation standpoint, Asian markets currently offer compelling advantages. U.S. stocks are still trading at a high 3.9x price-to-book ratio. In contrast, Japanese equities trade at a much lower 1.3x price-to-book and a 13x forward price-to-earnings ratio—both near historical lows. Additionally, Japan is in the midst of an earnings upgrade cycle.

Economic forecasts also favor Asia. Experts anticipate Japan’s GDP to grow by 0.9% this year, while Asia excluding Japan is expected to see 0.8% growth. Meanwhile, the U.S. economy is projected to contract by 0.9%.