A Concise and Comprehensive Review of Asset Class Performance in 1H 2025

The Enormous Rich U.S. Stock Market

Bear in mind that the U.S. stock market is huge. Its capitalization represents about half the world total. When the U.S. sneezes, the world usually catches a cold, but this time the rest of the world doesn’t seem sick at all.

Most non-U.S. stocks are cheaper than U.S. stocks because the U.S. stock market is very expensive. In theory, money seeks its best application. For now, the best application may be outside the U.S.

Diversification Works, Finally

Because U.S. stocks are lagging, diversification has “worked.” Investments in other assets have benefited performance, as can be seen in the performance of target date funds (TDFs). In the past decade, until now, diversification did not work, because U.S. stocks dominated.

Risk Exposure in Target Date Funds (TDFs)

The TDF industry is an oligopoly dominated by just a few firms. Oligopolies stymie innovation, but the next market crash will generate an outcry for a movement to safety, especially from those near retirement, namely our 75 million baby boomers. TDFs can — and should — be safer.

The concentration of TDFs in U.S. stocks and bonds is a bet that has generally paid off, but a stress test reveals the exposure. The next crash of the U.S. stock market will be most devastating to the baby boomer cohort because they are in the retirement risk zone. There are two distinct groups of TDFs — safe and risky. Risky (“Industry” in the image below) has generally won, but safe (“SMART”) will shine in the next crash, as it has in previous market downturns.

The Risky TDF Industry is 85% risky at its target date, with 55% in equities plus 30% in risky long-term bonds. By contrast, SMART is only 30% risky, with 70% in Treasury Bills and short-term TIPS. The safe SMART glidepath is followed by Soteria Personalized Target Date Accounts. The $850 billion Federal Thrift Savings Plan’s TDFs are also 70% safe at their target dates, as are the Dimensional Fund Advisors TDFs and the conservative RPAG flexPATH TDFs. The “safe group” is small but respected.

The Very Expensive U.S. Stock Market

The U.S. stock market is currently very expensive by every measure, more than three standard deviations above historical levels, which is highly statistically significant — hence the words “very expensive.”

When this has happened in the past, markets have reacted by becoming less expensive, and low or negative investment returns would follow, because return on investments is based on the price paid. That realization is setting in now in the U.S. stock market. The higher the price paid, the lower the subsequent return. That’s just simple math.

Stein’s Law: If something cannot go on forever, it won’t.

Conclusion

Buddha said, “Impermanence is eternal.” The world is always changing. So far this year, the U.S. stock market has lost its dominance on the world stage, yet investors have been unfazed.

What lies ahead? Are investors in the U.S. stock market simply not seeing the financial danger they’re in? Will the US stock market continue to reach new highs? What do you think?

Next week I will publish my new book, Fixing Target Date Funds: A Fiduciary Guide to Ameliorating Alarming Deficiencies. Please let me know if you’d like to see it. I’ll provide free e-books for 30 days.

Ron Surz is president of Target Date Solutions, developer of the patented Safe Landing Glide Path and Soteria personalized target date accounts. He is also co-host of the Baby Boomer Investing Show. Surz’s passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book, “Baby Boomer Investing in the Perilous 2020s,” and he provides a financial educational curriculum.

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