Capital Ideas^™ 
Investment insights from Capital Group

Signs of the wavering dominance of U.S. equities renewed interest in global equities in early 2025. Now, the market volatility following the April 2nd “Liberation Day” announcement of U.S. tariffs is giving investors even more impetus to take a fresh look at global equity strategies and rethink assumptions embedded in their portfolios. The current disruption is the latest step in a multi-year trend of changing global trading patterns and tariffs. This dislocation presents risks and opportunities for institutional investors and underscores the importance of active management in global equity mandates.   

Change brings opportunity for active investors

Our portfolio managers see this moment as ripe with opportunity for thoughtful stock selection.

While new tariffs pose challenges, portfolio managers believe that multinational companies that adapt could gain enduring strategic advantages. Their scale, flexibility and experience in global markets make them more capable of navigating disruptive environments than their single-market competitors.

In this environment, investors need to put individual company and sector positions under the microscope. For example, tariffs were levied quickly on commoditized heavy industries such as metals and autos, weighing on companies in or adjacent to those industries. Conversely, there may be less impact in growth sectors like biopharma and semiconductor equipment, where some companies operate with limited competition. Those that provide essential products to the U.S. — such as patented drugs and specialized semiconductors and semiconductor-making equipment — also may be less affected if their products cannot easily be replaced by U.S. producers.

To be sure, the impact of tariffs could vary substantially, even within the same industry and country of domicile. Certain companies may be more affected by tariffs than others based on the locations of their supply chains and customers. 

This new era of tariffs and protectionism could put “multilocal” companies at a strategic advantage. These are multinationals with the resources to respond to local-market consumer preferences and regulatory regimes, even as they enjoy economies of scale, diversified customer bases and global brand recognition. Pharmaceutical companies Novo Nordisk and AstraZeneca, based in Denmark and the U.K., respectively, are good examples. They are expanding research and manufacturing operations in the U.S., which could help reduce their exposure to U.S. tariffs. This highlights the importance of a global approach to equity investing as companies’ domiciles become less important. 

Ultimately, we believe that active managers are well positioned to nimbly adjust portfolios to navigate these uncertainties and respond to fast-moving developments in global trade policy. 

How our global equity portfolio managers view the opportunity set

For investors assessing the evolving trade picture, the focus may be less on whether U.S. or non-U.S. companies will prevail than on finding the winners and losers in all geographies — an effort requiring fundamental research at the core.

But global trade developments are not the only source of potential opportunities. Equity valuations, for instance, clearly point to opportunities outside the U.S. market. Non-U.S. stocks carry far lower multiples than U.S.-based competitors, offering a broad set of attractively priced equities to then assess through the lens of tariffs. 

A potential decline in U.S. market concentration may also create fresh opportunities for investors. The Magnificent 7 stocks that have driven U.S. equity market gains in recent years are the latest in a string of once impregnable market leaders that includes technology stocks in the 1990s, Japanese stocks in the 1980s and the “Nifty Fifty” growth stocks that dominated U.S. markets in the early 1970s.

A pullback in the Magnificent 7 could lead to gains in a broader swath of large-cap companies. As shown below, several dozen companies whose market caps collectively equaled the Magnificent 7’s at year-end 2024 generated significantly higher sales and profits. This highlights another large and diverse opportunity set. 

Our global equity team believes earnings growth will support this trend. They expect S&P 500 Index companies outside the Magnificent 7 to narrow the growth gap with the Magnificent 7. This could increase the likelihood that a larger swath of companies will contribute to equity market returns. 

Summary 

The new U.S. administration has brought a renewed emphasis on restructuring global trade and other policies intended to rewire the U.S. economy. As these efforts take hold, multinational companies will be challenged to navigate a rapidly changing operating environment. For investors, the key will be to assess the growth prospects of multinationals and their ability to navigate evolving global trade patterns, regardless of their geographies.