• This week our US Equity Sentiment Indicator (SI) slipped to -0.6 from -0.5 alongside a flat S&P 500. While the level of our SI is not depressed, the recent decline was the sharpest move within a 6-month period since 2020. Sharp drops in our SI have historically preceded above-average gains in the S&P 500 during the subsequent 3 months.
• Long-term data from the Fed show foreign ownership of US equities stands at an all-time high. Foreign investors owned just 2% of US equities in 1960 and 7% in 2000 but 18% of US equities at the start of 2025. 49% of foreign holdings are from investors in Europe.
• The sharp downgrade in the pricing of US economic growth and the underperformance of the S&P 500 (-3% YTD) relative to Europe's STOXX 600 (+9%), China's CSI 300 (+1%), and Japan's TOPIX (flat) have prompted investors to inquire about the potential for foreign investor outflows.
• We forecast foreign investors will remain buyers of US equities this year. The weaker USD and relative underperformance of US stocks lead us to forecast foreign investors will buy $300 billion of US equities in 2025 compared with $304 billion in 2024. In 2025, we forecast corporates will be the largest buyer of equities (+$675 billion) followed by households (+$425 billion). Mutual funds will be the largest seller of US equities (-$550 billion) followed by pension funds (-$250 billion).
• Beyond 2025, we see several reasons supporting continued foreign investment in US equities. First, US equities have superior liquidity compared with non-US stocks. Second, the US offers superior economic and earnings growth prospects compared with other regions. We forecast S&P 500 EPS growth of 7% in both 2025 and 2026. In contrast, our European strategists recently upgraded their EPS growth forecasts but still see only 4% and 6% growth in 2025 and 2026.
• Risks to long-term foreign demand for US stocks include US monetary and economic uncertainty, a deceleration in domestic economic growth, and disappointments in the returns on spending related to AI. Foreign investors own 28% of the median company on the list compared with 15% for the median S&P 500 index constituent. These stocks are potentially at risk if foreign investors dramatically reduce their ownership of US stocks.