Investing.com -- Market broadening could become 2025's pain trade, Barclays (LON:BARC) suggests, as US Tech dominance comes under pressure.
“Broadening is the pain trade and may give Europe a chance to catch up,” strategists spearheaded by Emmanuel wrote, pointing to Tech’s outsized role in global portfolios.
US funds accounted for 55% of total equity inflows since 2020, with Tech receiving a third. Excluding technology stocks, “the outperformance of the US vs Europe has been pretty much erased,” and the valuation gap between US and global equities has narrowed. This concentration leaves US portfolios vulnerable if investors rotate out of AI winners.
“A reversal in momentum and rotation out of AI winners is a pain trade for US-heavy global portfolios, as well as for US households,” strategists noted.
European equities saw a short squeeze on Trump-related relief but no sustained inflows. Still, Barclays believes that the region, and more broadly the so-called rest-of-world (ROW) equities, could benefit from the market broadening.
According to the bank, this could happen even if the non-tech segment of the US market may benefit too, as the Trump risk remains for ROW stocks.
Outside retail investors, positioning remains restrained. “Bullish price action in January wasn’t reflective of widespread investor enthusiasm,” strategists wrote, noting that mutual and leveraged funds have only modestly increased risk while cash allocations remain high.
In contrast, retail traders drove households’ equity exposure to record highs in January amid strong demand for stocks and crypto.
Meanwhile, cyclicals, while outperforming, do not appear uniformly crowded. According to Barclays, the average global fund is currently 25% allocated to the tech sector, up from 15% in 2025.
“High concentration makes portfolios vulnerable to further unwind of the AI trade, but may be an opportunity for active managers to shine again,” the firm warns.
European funds also have heavy exposure to Tech and Industrials, while hedge funds remain underweight Autos, Telcos, and Mining.
Tech dominance has been the chief driver of US exceptionalism, but this also leaves it vulnerable to a potential downturn if momentum reverses. Excluding the Magnificent 7 group, US equity performance since 2020 has been largely in line with Europe’s Stoxx 600 index.
With AI trade risks rising and positioning increasingly concentrated, “a prolonged unwind of Tech positions could hurt indeed,” strategists cautioned.
Barclays sees potential for European equities to close the gap as positioning remains light in key areas like China-exposed stocks, exporters, and short-cycle plays. “Although the bulk of the equity inflows YTD has gone to US equities, again, the extreme divergence with Europe since late '24 has begun to narrow,” the bank noted.