MW This strategist's theory of relativity says it's time to be underweight U.S. stocks
By Jamie Chisholm
Japan and emerging markets should be bought instead, says Ned Davis Research
How stocks perform in relation to others is important when crafting a portfolio.
The U.S. stock market continues to absorb its knocks, whether geopolitical, credit-linked or trade-induced and sits pretty much at record highs.
Any dips continue to be bought as investors bet on lower interest rates and strong corporate earnings. The S&P 500 SPX is now up 14.6% so far in 2025, the Nasdaq Composite COMP up 18.8%.
But that's not good enough for Tim Hayes, global chief strategist at Ned Davis Research. In a note published Thursday, Hayes says investors should reduce their exposure to the U.S. and increase their weighting in Japan and emerging markets (EM).
His reasoning mainly centers on signs of deteriorating relative performance by U.S. stocks, with some fundamental and foreign exchange factors thrown in.
American equities account for nearly two thirds of the MSCI All-Country World Index's market capitalization, Hayes notes, and of course Wall Street strength has been needed for the ACWI ACWI to move higher this year.
"But despite the U.S. comeback from its April lows and renewed relative strength into the summer, the U.S. has underperformed the ACWI year-to-date and over the past 21 days," he says.
Among the regional indices, the MSCI Emerging Markets index has posted the biggest advance in 2025, a gain of 25% compared with 14% for the MSCI U.S. index, according to Hayes. And over the last 21 days, the MSCI Japan index has been strongest, gaining 4% compared with a marginal advance for the U.S.
And these relative moves have triggered a sell signal for U.S. stocks in NDR's equity modeling, as the smoothed 20-day change of the U.S. relative strength line (see chart) has fallen to its lowest level since the April equity swoon.
In contrast, relative price momentum indicators have been improving for both EM and Japan, sparking buy signals. "Valuations are far better for EM than they are for the U.S., which is the most expensive regional index based on the metrics in our Global Stock Market Valuation report," says Hayes.
In particular, he notes, inflows into EM exchange-traded funds have contrasted with U.S. outflows over recent months. Improving strength in many EM currencies has helped this trend.
And currency shifts have also been a positive influence on Japan, though here the country's equities have benefited from yen weakness. "Positively correlated with USD/JPY (USDJPY), the MSCI Japan Index's relative strength has tended to improve when year-to-year yen momentum has been negative, as it has been since July," says Hayes.
Japan's relative strength line has risen to a 15-month high, and 86% of NDR's market indicators for the country's stocks are bullish. Hayes stresses that some recent Japan outperformance is based on hopes the new government will successfully implement its growth policies, but that structural reforms may prove difficult.
Still, in response to these signals NDR is downgrading the U.S. from marketweight to underweight, upgrading Japan from marketweight to overweight, and adding more exposure to their EM allocation.
"The duration of the current trends cannot be known," Hayes says. "But what can be said is that according to our composite models, the weight of the evidence calls for the continuation of U.S. underperformance and outperformance by EM and Japan."
Two ETFs that track Hayes' preferred regions are iShares MSCI Emerging Markets EEM and iShares MSCI Japan EWJ.
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar index DXY is up, while oil prices (CL.1) dip after a big bounce and gold futures (GC00) are trading around $4,085 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 6738.44 1.12% 1.43% 14.57% 16.02% Nasdaq Composite 22,941.80 1.68% 2.49% 18.80% 24.58% 10-year Treasury 4.014 0.00 -16.20 -56.20 -23.20 Gold 4083.8 -4.31% 7.76% 54.73% 47.92% Oil 61.62 7.63% -5.48% -14.26% -14.05% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
The U.S. government has brought people back from furlough in order to produce the consumer price index data for September, due for release at 8:30 a.m. Eastern.
Other U.S. economic data due Friday include the S&P flash services and manufacturing PMIs for October at 9:45 a.m., and consumer sentiment for October at 10 a.m.
U.S. President Donald Trump said he was halting trade negotiations with Canada after he was annoyed by an anti-tariff advert.
Intel shares $(INTC)$ are rising after results showed a turnaround taking hold. Ford stock $(F)$ is also higher after earnings pleased investors.
Target (TGT) will reportedly cut around 8% of corporate jobs as CEO Michael Fiddelke wants to reduce the "complexity" that's slowing down the retailer.
Procter & Gamble $(PG)$ and General Dynamics (GD) are among the companies reporting results on Friday.
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The chart
Source: Cboe. In chart, FLEX refers to options that are customizable.
The Cboe has just sent out its quarterly U.S.-listed options update, and it confirms what market participants have been experiencing: the sector is going gangbusters. "Double-digit returns for equity investors and increased volatility are driving unprecedented levels of activity in listed options this year, with data indicating total volume in 2025 will top 13.8 billion contracts, a sixth straight annual record," says the Cboe. The primary growth drivers include increased retail engagement, responsible for nearly half the total daily option volume, and a resurgence in large-block institutional trades over 1000 contracts in size.
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker Security name BYND Beyond Meat TSLA Tesla NVDA Nvidia INTC Intel GME GameStop AMD Advanced Micro Devices TSM Taiwan Semiconductor Manufacturing PLTR Palantir Technologies AAPL Apple QBTS D-Wave Quantum
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October 24, 2025 06:55 ET (10:55 GMT)
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