Introduction
Investment strategies, especially those involving equity markets, have long relied on the principle of diversification — that spreading investments across a variety of assets or regions can mitigate risk. In the context of equity investing, diversification typically means allocating assets between domestic and international equities. U.S. equities, being largely domestic in focus, have traditionally been considered part of a “home country” allocation, while international equities — encompassing both developed and emerging markets — were considered a separate asset class within a broader global strategy.
However, the ongoing globalization of financial markets and the increasing international exposure of U.S.-listed companies have raised questions about the validity of this framework. Due to these global linkages, U.S. equities should increasingly be viewed as part of an international allocation in an investment portfolio. Specifically, it examines three key factors that support this argument: (1) the significant international exposure of U.S. companies, (2) the rising economic interconnectedness between the U.S. and other global markets, and (3) the implications for portfolio diversification and risk management.
Globalization of U.S. Equities
International Revenue Exposure
One of the key features of the evolving nature of U.S. equities is the increasing proportion of revenue generated by U.S.-listed companies from international markets. In recent decades, many large-cap U.S. corporations have expanded their operations globally, establishing themselves in foreign markets and relying on overseas revenue streams. A prominent example is Apple Inc., which generates roughly 60% of its revenue from international markets. Similarly, multinational corporations such as Microsoft, Johnson & Johnson, and Coca-Cola have seen a substantial portion of their revenues derive from outside the United States.
According to data from the U.S. Department of Commerce and various financial research firms, approximately 40% of the revenue for companies in the S&P 500 index comes from foreign markets. This trend reflects the global nature of modern business and the increasing reliance of U.S. corporations on international sales, supply chains, and investments. Consequently, the fortunes of U.S. companies are increasingly tied to global economic conditions, making U.S. equities more exposed to international market movements.
Cross-Border Capital Flows
In addition to revenue exposure, U.S. equities are becoming more integrated into global capital markets. Foreign investors have significantly increased their ownership of U.S. stocks over the past few decades, attracted by the size, liquidity, and stability of the U.S. markets. As of recent data, foreign investors hold over 25% of the total market capitalization of U.S. equities, a proportion that has steadily risen since the 1990s.
Moreover, U.S. companies are increasingly participating in cross-border mergers, acquisitions, and joint ventures, further strengthening the links between U.S. and international equity markets. The proliferation of American Depositary Receipts (ADRs), which allow foreign companies to list shares on U.S. exchanges, has also facilitated greater integration between U.S. and non-U.S. equity markets.
The Changing Composition of Global Equity Indices
The globalization of U.S. equities is also evident in the evolving composition of global equity indices. The MSCI All-Country World Index (ACWI), which includes both U.S. and non-U.S. equities, is increasingly driven by the performance of U.S. companies with substantial global operations. As the global economy becomes more interconnected, the weight of U.S. equities in global indices has increased, reflecting the dominance of U.S.-based multinationals in the global economy.Furthermore, many international equity indices, such as the MSCI EAFE (Morgan Stanley Capital International and Europe, Australasia, and Far East) index, now include a substantial number of U.S.-listed companies with significant exposure to foreign markets (see chart below). The rise of global exchange-traded funds (ETFs) that track these indices further reflects the blending of U.S. equities with international equity markets.
The Economic Interconnectedness of U.S. and Global Markets
The economic relationship between the U.S. and other countries has evolved beyond simple trade flows to include broader financial and economic linkages. The U.S. economy, while still the largest in the world, is no longer as insular as it once was. Major global events — such as the 2008 financial crisis, the COVID-19 pandemic, and the recent global energy crisis — have shown that economic and market conditions in one region can rapidly affect the entire world.
For example, during the 2008 global financial crisis, the collapse of Lehman Brothers and the subsequent market selloff did not only impact U.S. equities but also led to severe declines in international stock markets. More recently, the effects of the COVID-19 pandemic on global supply chains, demand patterns, and financial markets further underscored the interconnected nature of modern economies. These events suggest that U.S. equities are no longer isolated from global market dynamics, reinforcing the argument that they should be considered part of a broader international allocation.
Implications for Portfolio Diversification
Risk and Return Dynamics
The traditional view of U.S. equities as a separate asset class in a portfolio is based on the assumption that their performance is driven primarily by domestic factors, and therefore, U.S. equities provide a distinct source of risk and return. However, as U.S. companies become more integrated into the global economy, the risk and return profiles of U.S. equities increasingly overlap with those of international equities.
While U.S. equities may still offer a degree of diversification relative to international markets, this diversification benefit is diminishing as U.S. companies generate more revenue from abroad and as financial markets become more globally synchronized. As a result, the incremental diversification benefits of adding U.S. equities to a portfolio containing international stocks may be reduced over time, especially for investors in regions with high U.S. exposure.
Portfolio Construction
From a portfolio construction perspective, the integration of U.S. equities into an international allocation requires a reevaluation of the role of home-country bias. Historically, investors have tended to overweight domestic equities due to familiarity and comfort with local markets. However, the increasing international exposure of U.S. companies and the rising correlations between U.S. and international markets suggest that this bias may no longer be as relevant. A more globally diversified portfolio would account for the international operations of U.S. companies, thus leading to a potentially more efficient allocation of capital.
Additionally, the increasing importance of environmental, social, and governance (ESG) factors in investment decision-making further supports the case for considering U.S. equities as part of a global portfolio. As global standards for ESG performance continue to evolve, U.S. companies are increasingly subject to the same global norms and regulations as their international counterparts.
Conclusion
With U.S. companies increasingly spreading their wings worldwide, it’s starting to feel a bit odd to keep calling U.S. stocks “just” a domestic asset. Think of it like this: if U.S. equities were a person, they’d be jet-setting across the globe, picking up international revenue streams and shaking hands in every time zone. Global markets are more connected than ever, and it’s showing up in our portfolios, too. This shift doesn’t just shake up the old-school portfolio playbook; it highlights how investing is adapting to a world where borders are less and less meaningful. Time to think globally!
-Brad Carroll, CFP®, MPAS™, APMA™, AWMA™
References
- Asness, C., Frazzini, A., & Pedersen, L. H. (2013). Leverage Aversion and Risk Parity. Financial Analysts Journal, 69(2), 62-77.
- MSCI (2023). MSCI All Country World Index Factbook. MSCI Inc.
- Shiller, R. J. (2015). Irrational Exuberance (3rd ed.). Princeton University Press.
- U.S. Department of Commerce (2022). Foreign Direct Investment in the United States. U.S. Bureau of Economic Analysis.