Ned Davis Research: Japan and Emerging Markets Poised to Outperform U.S. Stocks
Despite Wall Street’s resilience through waves of geopolitical tension, credit risks, and trade disruptions, the U.S. stock market continues to hover near record highs. The S&P 500 has gained 14.6% in 2025, while the Nasdaq Composite is up 18.8% — strong numbers, but not strong enough for Tim Hayes, Global Chief Strategist at Ned Davis Research (NDR).
In a new report, Hayes advises investors to cut exposure to U.S. equities and shift allocations toward Japan and emerging markets (EM), pointing to weakening relative performance in American stocks and improving fundamentals abroad.
Signs of U.S. Underperformance
While U.S. equities still dominate — accounting for nearly two-thirds of the MSCI All-Country World Index (ACWI) — Hayes notes that the U.S. has underperformed the ACWI both year-to-date and over the past month. In contrast, emerging markets have surged 25% in 2025, and Japan’s MSCI Index gained 4% in the past 21 days, outpacing the modest advance of U.S. stocks.
These shifts have triggered an NDR sell signal for U.S. stocks, as short-term relative strength indicators hit their weakest level since April. Meanwhile, buy signals have appeared for both Japan and EM, driven by improving price momentum and better valuations.
Valuations and Currency Trends Favor EM & Japan
“Valuations are far better for EM than they are for the U.S., which remains the most expensive regional index globally,” Hayes writes. Strong capital inflows into EM ETFs and strengthening local currencies have supported the rally.
Japan, too, is benefiting — but for different reasons. A weaker yen has boosted corporate earnings and stock performance, while investor optimism surrounding new government growth initiatives has lifted sentiment. According to NDR, 86% of indicators for Japan’s market are bullish, and its relative strength has reached a 15-month high.
Portfolio Implications
In response to these signals, NDR is downgrading the U.S. to underweight, upgrading Japan to overweight, and increasing EM exposure.
“The duration of these trends cannot be known,” Hayes cautions, “but the weight of the evidence supports continued U.S. underperformance — and relative strength in EM and Japan.”
For investors looking to follow Hayes’ lead, two key ETFs are:
- iShares MSCI Emerging Markets (EEM)
- iShares MSCI Japan (EWJ)
