The end of the easy US stock bet has been good to contrarians
May 30, 2025
(Bloomberg Markets) — On Wall Street, it’s been years since anyone had to think very hard to make money. Buy the largest US stocks, ignore everything else and watch your portfolio soar. Investing was reduced to one-click simplicity.
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Then life got more complicated. President Donald Trump’s sudden tariff escalation in April offered a glimpse of what a world without that certainty might look like. Confidence wavered—not just in megacap resilience, but in American economic exceptionalism and Trump’s market-friendly reputation. But after a sharp market decline, some of the panic subsided.
The president backed away from some of his most dramatic tariff plans, and major US equity indexes bounced back. On May 28, a US trade court said many of Trump’s tariffs were illegal, with the administration appealing the decision. Yet for many, the market and political mayhem highlighted the increasing fragility of the one-way buy-America trade.
You can still see the shadows of all that doubt in the lower value of the dollar, in Moody’s Ratings’ (
MCO
) recent decision to downgrade America’s debt, and in the steady drumbeat of money finding its way to anything that isn’t just another bet on US stocks.
A motley crew of finance professionals long dismissed as having complex and cautious strategies have been having their moment. With megacap valuations still looking stretched, these money managers are pitching a slew of allocation ideas to investors newly receptive to the age-old virtue of diversification. “I am looking forward to this being a world again where prices matter,” says Ben Inker, the co-head of asset allocation at Grantham Mayo Van Otterloo, a money manager known for bull-market skepticism as well as its dedication to value investing.
His GMO International Developed Equity Allocation Fund is up about 20% this year—its biggest outperformance over the S&P 500 (
^GSPC
) since the strategy’s 2006 inception. The fund has about half its assets in Europe and almost 30% in Japan.
Meb Faber, too, has been waiting patiently for this. The founder of Cambria Investment Management LP has been calling the end of the US exceptionalism trade for years. Before 2025 his model, which spread money across regions and assets, had trailed the S&P 500 in 14 out of 16 years. Now people are seeing the virtues of contrarian strategies. “Nobody is interested in talking about or wanting any of these investments, and all of a sudden you just blink, and the next thing you know, they’re outperforming,” Faber says.
Nothing lasts forever, Faber says. He points the 1980s, when international markets, Japan’s in particular, left American equities in the dust. That episode foreshadowed the Nikkei 225’s (
^N225
) two decades of woe.
Fund flows highlight the shift away from the go-long-US trade. International equities are attracting money in droves. Exchange-traded funds holding value stocks, which typically snub the top-heavy Magnificent Seven tech stocks, have already seen $30 billion in inflows this year.
Hedge funds attracted about $14 billion in cash this year through April, according to data compiled by fund administrator Citco. And quantitatively driven diversification strategies—with names like risk parity and factor investing that seem designed to resist easy marketing—are gaining fresh attention.
Also on the hot list: buffer funds, a breed of ETF that employs stock options to limit a portfolio’s downside while capping the upside. And there’s been a revival of once-dormant techniques such as portable alpha, a way of using borrowed money to try to sprinkle some idiosyncratic bets on top of exposure to the market index. “There’s not as big an opportunity cost in introducing diversification and having to sacrifice that core stock exposure,” says Corey Hoffstein, chief investment officer of quantitative money manager Newfound Research, speaking of portable alpha.
This year “has been about making diversification look great again,” says Dan Villalon, principal at AQR Capital Management LLC, a Greenwich, Connecticut-based manager of quant and hedge fund strategies. “We see it in every dimension: We see in equity markets. We see it in asset classes. We see it in alternative strategies.” AQR has long warned that US dominance of equity markets is at risk and that investors are underdiversified. Of course, the push to spread out risks comes with big pitfalls. In an age of artificial intelligence advances, there’s a constant fear of missing out on another Big Tech rally.
Already, chipmaker Nvidia Corp. (
NVDA
)—a key member of the Mag 7—has roared back from its April depths, notching a near-30% return over the past month. Moreover, the leverage used in many market-defying strategies can easily backfire. And many of these techniques layer on cost and are poorly understood by clients. Villalon, for example, has been an outspoken critic of buffer funds.
AQR has published research arguing that a simple mix of stocks and safe Treasury bills is a better bet for those seeking downside protection.Christine Benz, director of personal finance and retirement planning at the research firm Morningstar Inc., likewise argues that most individual investors can do just fine with a low-cost, do-it-yourself version of diversification. Just own a broad of mix of different assets.
“I would argue that the basic principles of asset allocation are delivering beautifully this year—the vanilla strategy of holding cash and bonds to cushion against equity losses has been a winning one. Diversifying equity exposure globally has also helped.”
And there’s still a large chorus warning against giving up on stocks in the world’s most dynamic economy. “With ever more complex investment products becoming available to retail investors, history keeps proving that a simple, diversified portfolio of large-cap stocks wins out,” says Liz Miller, president of Summit Place Financial Advisors LLC. “Alternative and structured investments can appeal to investors’ fears of market volatility, but long-term growth comes from investing appropriately in equities and staying committed throughout market turmoil.”
Still, investors seem to have widened their view of the range of outcomes. For Vineer Bhansali, CIO and founder of LongTail Alpha LLC, it’s been the busiest time since the onset of the pandemic. LongTail’s name refers to the rare but extreme events that can occur at both ends of the bell curve of possible market outcomes; the firm sells strategies that hedge the really bad ones but often suffer losses in a bull market.
Bhansali says clients are calling all day with concerns about high exposure to US stocks and market patterns breaking down. Recently, a $24 billion Australian pension fund allocated to the strategies. “Everybody has a lot of US assets,” Bhansali says. “Trade, the reason this whole thing is happening, is a global phenomenon. Everybody gets pulled into it. Everybody’s concerned about what happens to their old global asset allocation.”
