Global pension funds cut US equity exposure as valuation concerns grow

14:45

By: Azzat Manal

Global pension funds cut US equity exposure as valuation concerns grow

Major global pension and investment funds are reassessing their positions in US equities as concerns grow over elevated valuations and the increasing concentration of market gains among a relatively small group of technology companies benefiting from the artificial intelligence boom.

Research cited by the Financial Times indicates that several large institutional investors have reduced the share of US stocks in their portfolios, bringing their exposure below the weight of American equities in major global benchmarks.

Among the institutions adjusting their allocations are Australian Retirement Trust, which manages around $260 billion in assets, Canada’s La Caisse, with approximately $388 billion, and the UK’s People’s Pension, which oversees about £45 billion.

The moves point to a gradual shift in institutional investment strategies, as large investors become more cautious about the sustainability of the strong gains recorded by US equities. Concerns are particularly focused on the widening gap between the valuations of some companies and the earnings growth supporting those valuations.

A survey by consultancy Marsh provides further evidence of this shift. The study, which covered 430 investment institutions managing more than $5 trillion in combined assets, found that around one-third of respondents plan to reduce their exposure to US equities over the next 12 months.

That proportion is roughly twice the level recorded a year earlier, suggesting that caution toward the US market has increased significantly among major institutional investors.

Valuation concerns are not the only factor behind the shift. Investors are also paying closer attention to the structure of the US stock market, where a relatively small number of mega-cap companies now account for a substantial share of major equity indexes.

Much of the focus is on companies benefiting from the enormous investment cycle surrounding artificial intelligence. Expectations surrounding AI-related growth have helped push US equity indexes to elevated levels, while the leading companies associated with the trend now account for more than one-third of the S&P 500.

A sharp correction among these heavily weighted companies could therefore have a significant impact on the broader index and on portfolios that closely track US benchmarks.

At the same time, lower allocations to US equities could redirect part of global investment flows toward alternative markets and asset classes, including non-US equities, bonds and other investments. Such moves would allow institutional investors to reduce concentration risk while broadening portfolio diversification.

The changing allocations suggest that some major investors are moving away from a strategy heavily dependent on continued US equity gains toward a more diversified approach. The shift reflects growing sensitivity to the possibility that current valuations could come under pressure if corporate earnings fail to match the high expectations built into market prices.