US now stands out for stock pickers as global rally shows cracks

This article was written by Bloomberg Intelligence Chief Equity Strategist Gina Martin Adams and Equity Strategist Gillian Wolff. It appeared first on the Bloomberg Terminal.

The links between global stocks have weakened sharply, with pairwise correlations — a measure of how closely stocks move together — sinking to their lowest levels in nearly seven years, signaling that parts of the world’s red-hot rally may be overextended and vulnerable as geopolitical tensions rise. While nine of the 14 largest markets in the MSCI ACWI Index are flashing warning signals, US stocks and key Asian markets like Japan, Taiwan, India and South Korea do not, suggesting they may still have room to run. Another signal, return dispersion — the gap between winners and losers — points to a more favorable backdrop for US stock pickers.

Pairwise correlations reveal too-hot rally at risk of reversal

Global stocks may be running too hot. One technical signal — pairwise correlations — has plunged to near seven-year lows, a sign the recent rally could be losing steam as investor exuberance runs high. Fear peaked in early April following Trump’s “Liberation Day” tariffs, hitting levels last seen during the 2020 market selloff. But the April 8 tariff pause triggered a rapid unwind, driving 30-day pairwise correlations to less than 1 standard deviation below the 2018-25 average. Recent history suggests caution: in four cases over 2024-25, similar drops were followed by global equity declines of 2.2% to 9.5% over the next month. In six prior episodes from 2018-21, returns underperformed the median half the time.

Correlation crash flags risk of cooling in many global markets

Among the 14 largest global markets, nine are showing pairwise correlations that are a full standard deviation below average over the past 30 days — a signal that historically suggests rallies may be overheating and are due to cool. Notably, the US and most Asian markets (Japan, Taiwan, India and Korea) are not flashing this warning and have yet to reclaim new one-year highs since the April selloff, indicating room for further upside. In contrast, Canada, Mexico, Brazil and Germany — markets that have hit new one-year or all-time highs this month — are flashing the signal, with the latter three already pulling back from recent peaks.

The warning is most concerning for the UK, Australian, Chinese, French and Swiss markets, where recent rallies have failed to reach new one-year highs and may be at risk of stalling.

Low dispersion limits stock picker gains after rebound

Stock pickers found fewer opportunities to shine during the post-“Liberation Day” rebound in global equities. While the world’s sharp market rallies since Covid have typically brought wider gaps between winners and losers, the mid-April to May bounce delivered muted stock-picking benefits. Equity dispersion — measured by the variance in 30-day returns across roughly 2,560 MSCI ACWI members — typically rises during rebounds but stayed low this time despite high daily volatility. That gap narrowed further in the most recent 30-day stretch through mid-June, dipping below the average since 2021 and signaling a tougher backdrop for generating alpha through stock selection.

While low correlations between global equities may have made stock picking look easier, low return dispersion has likely tempered the payoff.

High dispersion in the US contrasts lower dispersion abroad

A clear split has emerged since “Liberation Day:” US stocks are exhibiting greater differentiation, largely driven by tariff exposure, while international equities remain more uniform. Return dispersion remains relatively high, contrasting with muted dispersion abroad, which has weighed on overall MSCI ACWI dispersion. During the initial recovery between April 7 and May 16, S&P 500 members experienced their highest 30-day return dispersion in five years. While that gap has moderated over the last month, dispersion remains above its five-year average. In contrast, dispersion among ACWI stocks outside the US was comparatively muted and has now fallen below its five-year average.

US, Japan and Latin America stand out for stock pickers

Most global markets now show a rare mix of low pairwise correlations and low return dispersion — a combination that suggests stock picking may be easier yet less rewarding. Key markets in this category include China, Canada, Australia and major European markets like the UK, France, Switzerland and Germany. In contrast, the US, Japan and Latin America offer a stronger backdrop for stock selection, with below-average correlations and above-average dispersion pointing to better alpha potential. Unlike Latin America, however, the US and Japan aren’t flashing signs of extremely low correlations or overheating risk.