Karishma Vanjani

Global economic growth projections are getting chopped quickly. Diversified investors shouldn't sweat it.

Fitch Ratings cut its 2025 global growth forecast to 2.3%, down 0.3 percentage points from earlier predictions and well below trend. This follows a similar move by the Organization for Economic Cooperation and Development, which lowered its 2025 outlook for gross domestic product by 0.2 percentage points on Monday.

A Bank of America survey of fund managers on Tuesday showed the biggest monthly drop in global growth expectations in March since 2020.

Pessimism on the world economy is rampant, and that's bad for stocks. Much of these re-ratings stem from U.S. actions, such as higher import charges and policy uncertainty that have pushed the S&P 500 down 9% from its last peak on Feb. 19. The on-again off-again tariffs can put a hold on investments as businesses are left in the lurch when trying to decide on their next moves.

The U.S. stock market is important, no doubt; it holds outsize influence on the rest of the world. But a more balanced global portfolio can handle somber U.S. equity performance, as long as strong equity returns from abroad continue, spurred by earnings and better valuations, in the absence of a recession.

"The softening in US growth we have seen so far -- from above trend to below -- may be a sweet spot for assets in the rest of the world, [until there are] further sharp US growth downgrades from here," wrote Goldman Sachs' Senior Markets Advisor Dominic Wilson over the weekend.

Since the U.S. market fell from its last peak, Chinese equities, as measured by the MSCI China Index, are up 6.9%, and European equities, as measured by the Stoxx Europe 600, are up 0.4%. For the year, the two indexes are up 23.7% and 9.2%, respectively, while the S&P 500 is down 4.5%.

Overall, the iShares MSCI ACWI exchange-traded fund is up 1% in 2025. That's not a performance to gloat about, but it certainly demonstrates that there has not been a collapse of global portfolios. The ETF is weighed down by its 64% portfolio allocation to the U.S., while the rest is non-U. S. exposure composed mainly of Asia and Europe.

The bullish case for international stocks comes partially from valuation. In the U.S. stocks are still extremely expensive. The Shiller price to earnings ratio of the S&P 500 is around 35 times, double the average of 17.58 going back to 1881. The MSCI World ex-USA Index is trading around its normal levels around 25 times. (The Shiller P/E ratio smooths out any earnings volatility by comparing a stock price to its average earnings adjusted for inflation over time.)

"Look to buy, not sell," wrote UBS Strategist Andrew Garthwaite in a note on Tuesday, referring to the MSCI All Country World Index, which closed at 836.14 on Monday. Garthwaite stuck to a year-end target of 910, implying a 9% gain.

Earnings abroad can also help to offset weakness domestically. Analysts expect S&P 500 earnings per share to grow by about 11.6% in 2025 year-over-year. The consensus for the world is 10%. But earnings revisions globally as opposed to the U.S. appear stable when looking at the 13-week moving average, which adjusts for volatility seen around results season, Garthwaite wrote.

That's owing largely to euro zone improvements, such as military spending by Germany and loosening of fiscal strictures, as well as stabilization in emerging markets, such as China. Goldman has a positive stance on the latter country and believes Asia overall could be more resilient than the U.S. in the recent correction.

That's "due to (1) more attractive Asian equity relative valuations than during historical US correction episodes, (2) better economic growth and momentum YTD, and (3) potential further re-rating of Chinese equities if policy delivery and advancements in AI development continue," Goldman Sachs' Chief Asia Pacific Strategist Timothy Moe wrote on March 8.

Keep your portfolio diversified. The U.S. is crucial, but it's not the whole world.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.

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March 18, 2025 15:37 ET (19:37 GMT)

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