The FTSE All-World Index, a free-float benchmark covering about 95 % of global market capitalisation, has hit fresh highs this quarter—but not for reasons that please every portfolio manager. U.S. mega-cap giants now account for more than 61 % of the index’s weight, the largest share since its 1994 launch. Apple, Microsoft, and Nvidia alone command almost 15 %. Their outsized gains have distorted regional balance and sparked a debate over how to manage the global equity rotation now underway.
1. Why U.S. Mega-Caps Keep Pulling Ahead
Apple’s record iPhone upgrade cycle, Microsoft’s AI-driven cloud revenues, and Nvidia’s surging datacentre sales each beat consensus by double-digit margins. In response, all three stocks rallied more than 20 % year-to-date. Add Amazon and Alphabet to the list, and the Magnificent Seven have delivered 70 % of the FTSE All-World’s 8 % YTD return. Meanwhile, European and Japanese benchmarks tread water, and emerging markets struggle with currency weakness. This divergence pushes allocators to ask whether the concentration risk is justified—or if they should lighten U.S. exposure before Q3.
Leadership Metrics
- Apple trades at 28 × forward earnings, compared with its 10-year average of 20 ×.
- Nvidia’s free-float market cap broke US $3 trillion after Q1 results, now larger than the entire FTSE 250.
- Combined daily turnover of the top five U.S. names exceeds €65 billion, matching all 40 DAX stocks combined.
2. Regional Gaps Widen in the Global Equity Rotation
Europe ex-UK now carries only 14 % weight, Japan 7 %, and the UK 4 %. Even after a 25 % rally in the Nikkei, Japan’s share of the global pie remains capped by a shrinking free-float base. Currency moves add another twist: a strong dollar inflates U.S. weights because index levels use USD reporting. Conversely, the yen and euro weakness amplify non-U.S. underperformance once translated. That double effect deepens the global equity rotation, locking asset allocators into a feedback loop where U.S. dominance feeds on itself.
3. Sector Math: Tech Over Everything
Information technology now stands at 29 % of FTSE All-World, compared with 18 % a decade ago. Health care sits at 12 %, and industrials at 11 %. Energy, despite a 30 % rally in Brent crude, remains below 5 %. The index’s tilt toward platform software and AI chips means portfolio beta is more sensitive to U.S. Fed policy and global IT spending cycles than to oil prices or factory output. Critics argue this composition ignores many of the world’s fastest-growing small-cap innovators, especially in Asia, because they simply lack the mega-cap scale required for index inclusion.
4. Valuation vs. Risk: Is Trimming the U.S. Overweight Sensible?
At 21 × forward earnings, the FTSE All-World trades near its five-year high, yet valuation dispersion is extreme. U.S. tech sits above 28 ×, while Europe ex-UK trades at 14 ×. Emerging markets hover near 12 ×, weighed down by China’s 9 × multiple. Some CIOs see an opportunity: sell richly priced mega-caps and buy undervalued Europe or EM value. Others counter that earnings quality, share-buyback momentum, and balance-sheet leverage justify paying up. The debate will shape Q3 asset-allocation calls.
5. Fund-Flow Signals Point to More Global Equity Rotation
EPFR data show US-listed global broad-market ETFs pulled in US $15 billion during May, of which 83 % went to S&P 500 or Nasdaq-100 trackers. Regional funds for Europe attracted just US $1.3 billion, and Japan saw net outflows. Active global funds, however, trimmed U.S. weight by 60 basis points on average, signalling early attempts to lean against the global equity rotation. Whether passive inflows dominate or active trimming gains traction will shape index weight trends into year-end.
6. Currency Risk: Dollar Strength Clouds Rebalancing Plans
Allocators who cut U.S. weight must also hedge currency risk. A stronger dollar can erase gains in euro or yen assets. The Fed’s two-cut outlook for Q4 2025 may relieve dollar pressure, but sticky core inflation could delay easing, keeping USD elevated. Hedged share classes help, yet they cost 25–35 basis points annually, reducing the benefit of a cheaper market. Portfolio teams must weigh this drag against concentration risk in U.S. mega-caps.
7. Practical Tools to Navigate the Shift
- Equal-weight or minimum-variance global ETFs reduce single-stock dominance without abandoning passive exposure.
- Smart-beta factors, such as value or quality, systematically tilt toward under-owned regions like Canada or Switzerland.
- Covered-call overlays on mega-caps lock in gains while generating income, funding buys in lagging markets.
- Active country sleeves (e.g., India small-caps) add growth optionality beyond the standard benchmark.
Implementing these tactics allows investors to participate in future upside while tempering the risk of an abrupt reversal in the global equity rotation.
8. Upcoming Catalysts That Could Shift the Balance
- U.S. Presidential election polls may spark volatility in tech regulation.
- ECB and BOJ summer meetings could alter rate-differential narratives.
- China’s Politburo session in July may unveil fiscal stimulus, lifting EM weights.
- Q2 earnings season will test whether mega-cap growth can sustain its lofty valuations.
Each event offers a checkpoint on whether to dial back, hold, or even add to U.S. positions.
Conclusion
The FTSE All-World Index has rarely looked so top-heavy. Outperformance by U.S. mega-caps has driven a pronounced global equity rotation, raising questions about diversification, valuation, and currency risk. Some managers are already trimming America overweight positions, favouring Europe or emerging markets. Others remain convinced that structural advantages—dominant platforms, AI leadership, and balance-sheet strength—justify the concentration. With multiple policy and earnings catalysts on the horizon, the second half of 2025 will reveal whether this rotation pauses, accelerates, or swings back toward a more balanced world.