Emerging markets set to outperform US stocks as dollar weakness continues, Cambridge says

Core Insights - Global investors are advised to reduce exposure to US equities as emerging market stocks are expected to outperform developed market stocks for the first time in five years due to a weakening US dollar [1][4] - The US dollar has weakened significantly, dropping by 10% at one point this year, following a decade-long bull run that began in 2011 [1] - Cambridge Associates predicts a further decline in the dollar, anticipating a multi-year bear market starting in 2026 due to economic policy uncertainty, overvalued assets, and fiscal pressures [2] Market Performance - The weaker US dollar has positively impacted international stocks, with global non-US equities outperforming US equities by 6.6 percentage points in local currency terms and by 13.9 percentage points in US dollar terms in 2025 [3] - Latin America has shown remarkable performance in emerging markets, achieving a 37% year-to-date return on equities, supported by low valuations and improving macroeconomic conditions [5] Investment Recommendations - Cambridge Associates recommends investors to be overweight in global non-US equities in 2026, expecting the trend of outperformance to continue [4] - The heavy reliance on technology stocks in the US market makes it vulnerable, particularly if the artificial intelligence theme loses momentum, which could lead to a pullback by overseas investors [6] Valuation Metrics - The cyclically adjusted price-to-cash-earnings ratio for the MSCI USA index is 2.19 times higher than that of the MSCI Developed Markets index (ex-US), indicating a 50% premium to its long-term median [7] Economic Policy Context - The Trump administration is preparing to appoint a new Federal Reserve chair, with a focus on lower interest rates and a weaker US dollar to address the trade deficit and stimulate US industry [8]