US stocks are facing an awkward situation where increased buying leads to worse relative performance. Deutsche Bank warns that if the record foreign capital inflows into US equities reverse, the US dollar could face significant downward pressure.
According to data, on February 25th, Deutsche Bank macro strategist Tim Baker released a report indicating that despite global funds flowing into the US stock market at an unprecedented rate, the relative performance of US stocks has been surprisingly poor. The US market has lagged behind, with better performance seen in cheaper, more cyclical markets.
From Deutsche Bank's perspective, the key issue isn't just the change in stock market rankings, but the potential trigger of a larger chain reaction: whether overseas investors' "conviction" in their overweight position in US stocks will waver, and if such a shift could pull funds out of the habitual "buy US stocks, allocate US dollars" pattern.
**Capital Inflows Equivalent to 2% of GDP Pour into US Stocks** "The degree of favor US stocks enjoy across the market is incredible. Net equity inflows have never been this strong," Tim Baker stated bluntly in the report. "Throughout 2025, net inflows reached a staggering level equivalent to 2% of US GDP."
This is an extremely large figure. Deutsche Bank pointed out that this record net equity inflow alone is sufficient to finance two-thirds of the US current account deficit by itself.
In this capital feast, not only are foreign investors aggressively buying US stocks, but domestic US investors have also shown a strong "home bias." The report indicates that US investors' willingness to purchase foreign stocks remains weak. Over the past year and a half, the US has stood out among G10 nations. Aside from the UK being relatively close, the vast majority of G10 countries have experienced net outflows of equity capital.
**"The Worst Year in 15 Years": Biggest Buying, Yet Lagging Globally** However, the狂热 of capital has not yielded proportional returns. In hindsight, this frenzy of buying US stocks appears extremely ill-timed.
For over a decade, buying the dip in US stocks has been a consistently profitable strategy in global markets. But the rules of the game have changed dramatically in the past year or so. Deutsche Bank observes that the strongest performers are no longer US stocks, but those cheaper, more cyclically-oriented equity markets.
The尴尬 lies in the fact that US stocks are neither cheap nor belong to the cyclical sector.
"The extent of US stock underperformance relative to non-US assets has already become apparent in year-on-year calculations over recent months. Relative underperformance of this magnitude hasn't been seen in the past 15 years," Tim Baker said. Although US performance remains solid over a 3-year period, it has now fallen to its lowest recent point.
Why are cheaper and more cyclical markets starting to outperform? The logic lies in a strong global macroeconomic backdrop.
The trend of global economic data exceeding expectations has persisted for over a year, marking the second-longest streak of positive surprises on record. Positive economic data is typically highly correlated with rising global equity markets. The current environment is particularly favorable for corporations.
"Global corporate earnings are growing at a rate exceeding 15%. This is not unprecedented, but it usually only occurs during post-recession recoveries or at special macroeconomic junctures."
**Non-US Assets' Moment to Shine** Facing the worst relative performance in 15 years, coupled with initially overweight positions in US stocks, long-term investors now have ample reason to reconsider their capital allocation.
A core prerequisite for capital rotation is that non-US markets must be capable of at least keeping pace with US stocks. From Deutsche Bank's view, this premise is not only valid now but very reasonable.
First is the impetus for valuation repair. Over the past year, the valuation gap between US and non-US stocks, although narrowed, remains巨大. Deutsche Bank data shows the price-to-earnings premium for US stocks once reached as high as 70%. While it has since retreated, it remains at an absolute high of around 40%.
A more critical catalyst is the reversal in earnings fundamentals. This is a pivotal turning point with significant potential.
"The earnings story for non-US markets is finally starting to turn favorable. For a full 15 years, earnings for non-US assets were largely stagnant, while US earnings nearly tripled over the same period," Tim Baker emphasized in the report. "But now, non-US market earnings are showing a significant upward trend—rising sharply by 14% over the past six months."
Of course, Deutsche Bank maintains objective restraint. The report notes that this valuation and earnings convergence has limits. The profitability of US corporations still far exceeds that of the rest of the world. The return on equity for US stocks remains in the high teens percentage-wise, while non-US markets are in the low teens.
This structural earnings gap implies that valuations cannot fully converge. However, Deutsche Bank believes it is entirely possible for the US valuation premium to retreat to a more reasonable range of 20%-30%.
Additionally, markets need to be wary of a potential risk: the record capital expenditure currently being undertaken by US companies. If this ultimately fails to translate into high returns, it could directly drag down future profitability metrics.
**Core Scenario: How Capital Outflow Sounds the Alarm for the Dollar** If capital chooses to leave due to declining attractiveness of US stocks, the foreign exchange market would face an inevitable shake-up. This is the macroeconomic transmission logic investors should focus on most urgently.
Deutsche Bank clearly stated that US stock underperformance leading to weaker capital inflows, subsequently weighing on the US dollar, has clear historical precedent.
Rewind to the late 1990s. Following the tech boom and bust cycle, starting around 2002, US stocks began significantly underperforming globally. This was followed by a sharp reversal of US net equity inflows into negative territory, and the US dollar subsequently embarked on a multi-year depreciation cycle.
"While the magnitude of the decline this time might not replicate the severity of that period—which also coincided with the epic boom in China and emerging markets—the direction of capital flows back then holds strong indicative significance for the present," Tim Baker warned.
Over the long term, the pricing logic of the forex market is very clear: the long-term trend of the US dollar moves closely in sync with the relative performance of US equities compared to emerging market equities.
While the two are mutually causal, this perfectly aligns with the current macroeconomic scenario: Facing high valuations and underperforming results, if record foreign capital stops buying or even withdraws from US stocks, turning instead to non-US regions like emerging markets in search of better-valued assets, the US dollar—after losing this annual support equivalent to 2% of GDP—would see its downside alarm sound loudly.
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