Global Equity Returns Are Shifting from Concentrated Momentum to Broader Rotation

Overview

The report discusses structural changes in global equity markets since 2025: the long-standing post-financial-crisis dominance of the United States, technology, and growth styles is moderating, while the opportunity set across regions, sectors, styles, and individual stocks is expanding. Goldman Sachs believes this change increases the potential returns from diversification and active management.

Core views

The core view is that global equity returns are increasingly driven by earnings growth rather than valuation expansion, with market leadership broadening from single-factor momentum and mega-cap technology to more regions, sectors, and factors. The technology sector is experiencing free cash flow pressure and valuation downgrades due to surging AI- and cloud-related capital expenditure, although its earnings remain strong. Meanwhile, old-economy sectors related to industrials, energy security, infrastructure, and defense are benefiting from the capital expenditure supercycle. The report emphasizes that as growth and quality premiums decline, opportunities to find value within growth are increasing.

Analysis framework

The report analyzes evidence of global equity markets shifting from concentration toward broader participation through indicators including regional index returns, trailing 12-month return contributions, EPS consensus estimate revisions, equal-weighted versus market-cap-weighted index performance, relative returns of MSCI Momentum, free cash flow yields, forward P/E, DDM-implied growth, ROE, and pairwise correlations.

Methodology notes

• equity_strategyreturn_decomposition

  Return Contribution Decomposition

  Uses earnings growth, valuation changes, and other factors to explain the sources of regional and sector equity returns and assess whether market gains are supported by fundamentals.

• Valuation methodsforward_pe_comparison

  Relative Forward P/E Valuation

  Compares the 12-month forward P/E of sectors such as technology, software, and industrials, as well as the U.S. Top 5 stocks versus other stocks, to identify convergence in valuation premiums and sector repricing.

• Valuation methodsone_stage_ddm

  One-Stage DDM-Implied Growth

  Assumes a fixed equity risk premium and uses a dividend discount model to estimate implied future growth for the technology sector, comparing it with the dot-com period and long-term EPS CAGR.

• market_structurepairwise_correlation

  Pairwise Correlation

  Observes changes in the synchronization among stocks in major markets to assess whether idiosyncratic factors and opportunities for active stock selection are increasing.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global Equities

  Core covered asset

  Strengths

  Strong earnings growth, broader regional and sector participation, and increased opportunities for active stock selection.

  Weaknesses

  Rising capital costs limit the scope for valuation expansion, making returns more dependent on earnings delivery.

  Comparison

  Compared with the highly concentrated market of the fifteen years following the financial crisis, current opportunities are more diversified.

  Risks

  Downward earnings revisions, persistent inflation, and further increases in discount rates driven by higher debt and issuance.

• U.S. Equities

  Important regional allocation

  Strengths

  ROE remains the most attractive among major markets, while valuation declines provide an opportunity to re-engage.

  Weaknesses

  Influenced by mega-cap technology and hyperscalers, the U.S. has recently been the weakest-performing major region.

  Comparison

  U.S. regional returns have lagged Japan, Asia Pacific, and emerging markets, although earnings quality remains relatively strong.

  Risks

  Uncertain returns on mega-cap technology capital expenditure, declining free cash flow yields, and further valuation convergence.

• Technology Sector

  Center of rotation and valuation repricing

  Strengths

  Earnings growth remains strong, with hardware, memory, and chips supported by demand for computing power.

  Weaknesses

  Higher AI capital expenditure is eroding cash flow, while the software valuation premium has declined significantly.

  Comparison

  Technology has fallen from the most expensive sector to near its 20-year average, while industrial valuations have risen to higher levels.

  Risks

  Earnings sustainability, returns on AI investment, software disruption risk, and a cyclical downturn in hardware demand.

• Industrials Sector

  Beneficiary asset

  Strengths

  Supported by technology capital expenditure, energy security, critical infrastructure, and defense spending, with improving valuations and growth expectations.

  Weaknesses

  Valuations have risen to relatively high levels, and some subsectors may have priced in excessive expectations for the capital expenditure supercycle.

  Comparison

  Industrial valuations are currently higher than technology valuations and have exceeded their own 20-year range.

  Risks

  A slowdown in the capital expenditure cycle, constraints on government spending, and weaker-than-expected order delivery.

• Chinese Equities

  Regional comparison

  Strengths

  Strong export conditions and an important competitor to the United States in technology.

  Weaknesses

  China is the only major market with ROE below its historical average, indicating weaker profitability and returns.

  Comparison

  Low valuations offer an opportunity for renewed attention, but earnings quality is weaker than in markets such as the United States.

  Risks

  Insufficient profitability, fluctuations in external demand, and policy and geopolitical risks.

Key data

• Equal-Weighted S&P Performance Relative to the S&P 500More than 7.3%The report states that this is the first time since 2009 that the equal-weighted S&P has outperformed the market-cap-weighted S&P 500 by more than 7.3%.
• Global Software P/E PremiumApproximately 20%The software sector's relative valuation premium has fallen sharply from nearly 200% at the beginning of this century.
• Technology DDM AssumptionERP fixed at 4.0%The report uses a one-stage DDM to estimate implied growth for the U.S. technology sector.
• Primary Return DriverEarnings growthRegional equity returns over the past year or more have come primarily from earnings growth rather than valuation expansion and low interest-rate support.

Impact & implications

For portfolios, the report implies that the risk-adjusted return from simply pursuing U.S. mega-cap technology and high-momentum growth stocks has declined, while the importance of diversification, regional rotation, sector rotation, and bottom-up stock selection has increased. Investors may focus on technology subsectors with strong earnings growth but recently reduced valuations, as well as industrials, energy security, infrastructure, and defense-related areas supported by the capital expenditure supercycle.

Risks

• Technology capital expenditure may fail to generate sufficient future returns, leading to downward revisions to earnings expectations.
• Higher government debt, increased issuance, and persistent inflation may keep the cost of capital elevated and suppress valuations.
• Rapid rotation among AI, momentum, and high-growth stocks may cause short-term portfolio drawdowns.
• Earnings in technology subsectors such as hardware, memory, and chips are cyclical, and current growth may not be sustainable.
• If economic resilience weakens or M&A activity declines, broad market participation may retreat.

What to watch

• Whether global and regional EPS revisions continue to move higher.
• Whether the P/E premium of the U.S. Top 5 stocks relative to other S&P 500 constituents continues to converge.
• Changes in hyperscaler capital expenditure, free cash flow yields, and financing needs.
• Orders and investment cycles related to industrials, energy security, infrastructure, and defense.
• Relative performance of MSCI Momentum, equal-weighted versus market-cap-weighted indices, and pairwise correlations.