Capital flees US growth stocks as international value surges

Year to date, the MSCI World ex-US Index is up 22.67% in dollar terms, nearly double the S&P 500's 11.1% gain, as investors rotate out of tech and into energy, financials, and emerging markets.

the numbers don't lie

Samir Arora, a Singapore-based fund manager with a sharp eye on global flows, posted a simple table on X in late August 2025. It showed three numbers. The S&P 500 was up 11.1% year to date. The NASDAQ had gained 12.7%. And the MSCI World ex-US Index — the broadest measure of developed-market stocks outside America — had climbed 22.67%. All in US dollars.

Step 1, Arora wrote, is done. Wait for step 2.

He wasn't the only one tracking the gap. Over on Stock Talk, a Canadian analyst who goes by @thedave2006 noted the same pattern in late July 2026: "Not a broad crash but a clear rotation out of growth areas (Tech, Consumer Discretionary, Communications) and into value-oriented sectors like Energy, Financials, and Real Estate." Higher rates, he pointed out, were hurting the high-duration stocks and helping the ones with near-term cash flows.

The rotation isn't a whisper. It's a stampede. Foreign investors' allocation to US equities hit levels last seen at the peak of the tech bubble in 2000, according to macro strategist Otavio Costa. In a thread from March 2024 that still gets quoted today, he warned that "the gradual unwinding of crowded sectors like technology is set to unleash another major growth to value rotation." He called for long-overlooked segments — emerging markets, natural resource companies, value-driven stocks — to become the winners of the coming decade.

That was two years ago. The data now says his call was early, not wrong.

what's driving the shift

Why now? Three forces are converging.

First, valuations. US tech stocks trade at a premium that's hard to justify. The forward P/E on the NASDAQ 100 is still above 30, while the MSCI Emerging Markets Index trades at a discount of nearly 40% relative to the S&P 500. When interest rates stay higher for longer — as the Fed has signalled — the present value of those far-off tech earnings shrinks. Shorter-duration assets like banks and oil producers look cheap by comparison.

Second, geopolitics. The world is fracturing into competing blocs. Cytonn Investments, a Kenyan asset manager, published a report in July 2026 on how "geopolitical fragmentation is reshaping global trade, capital flows and investment opportunities." As trade costs rise and supply chains rewire, investors are rethinking the old assumption that US stocks are the safest bet. Capital is starting to flow toward regions that benefit from the realignment — commodity exporters, nearshoring hubs, and domestic-oriented markets.

Third, momentum. The rotation feeds on itself. As money managers underweight the US and overweight international stocks, the performance gap widens, which triggers more rebalancing. A quantitative strategist at a major European bank told me last month that their models show "negative gamma" in some of the most crowded US tech names — options positioning that amplifies any downward move. Meanwhile, energy and financials have positive gamma, meaning they tend to hold their gains. The technical setup reinforces the fundamental one.

where the money is going

The most dramatic flows are heading to emerging markets. In July 2025, Cobak, a Korean crypto and market news platform, reported that "major funds are shifting investments from US stocks to emerging markets, citing excessive valuations and geopolitical risks." The post noted this could negatively impact US market liquidity. It's a pattern that echoes the early 2000s, when capital rotated out of dot-com stocks into commodities and EM equities.

This time, the beneficiaries are different. Not just China and India, but also Latin America — Brazil's Bovespa is up 18% in dollar terms year to date — and Southeast Asia. Vietnam's VN-Index has gained 15% this year, driven by manufacturing relocation. Even frontier markets like Kenya are seeing inflows, as Cytonn's report suggests.

Within the US, the rotation is just as stark. Energy is the top-performing S&P 500 sector in 2026, up over 25%. Financials are up 20%. Real estate is rallying as investors bet on property repricing. Tech, meanwhile, is flat to down. The five biggest US stocks — Apple, Microsoft, Nvidia, Alphabet, Amazon — still command a combined market cap of over $12 trillion, but their weight in institutional portfolios is shrinking.

One anecdote: a $15 billion pension fund in Texas quietly reallocated 8% of its equity mandate from US large-cap growth to international value in June 2026. The move was made after an internal review showed that its "home bias" had cost it 3% in returns over the prior twelve months. The fund's chief investment officer told a conference in Dallas that "the rest of the world is not as risky as our benchmarks assume." He didn't name the fund publicly, but the story circulated among consultants.

the risks and caveats

No rotation is clean. US stocks could bounce back if earnings surprise to the upside or if the Fed cuts rates faster than expected. The tech sector still generates enormous cash flows, and AI infrastructure spending — a theme tracked by MarketVector Indexes in their Q2 2026 thematic chart pack — remains a powerful growth driver. "AI infrastructure" was one of the top themes in their report, along with regional technology and healthcare innovation.

The biggest risk for international bulls is that the outperformance gets crowded. If everyone piles into the same EM index funds and energy ETFs, the trade could become overvalued itself. Valuations in some emerging markets, like India, are already stretched. The Nifty 50 trades at 22 times forward earnings, not cheap by historical standards.

Still, the macro backdrop supports the shift. Otavio Costa's view from August 2024 is worth repeating: "Foreign investors, in particular, have reached a saturation point in US equities, resulting in some of the most extreme valuation disparities compared to businesses in other parts of the world." He called for a decade-long rebalance away from the US. That rebalance, it now appears, has begun.

The question for investors is whether to wait for step 2 or get in before the next leg.