No Atheists in Foxholes, no Patriots in Capital Markets

US investors go large on domestic equities while the rest of the world backpedals

Sentiment is fickle, particularly so regarding US equities at the moment. As the year turned, the IMF had revised US growth expectations upward and investors were looking forward to the wind in their sails, with returns elevated by tax cuts and deregulation promised by the new administration. As I write, the S&P 500 is down almost 5%, posting its worst quarterly performance since 2022.

How are fund investors responding? In aggregate, global fund flow data doesn’t show a rush for the exits—so far. Over Q4 2024, ETF investors were far more bullish on US equities (+$212.7bn) than those investing across other fund types (-$46.17bn). Of course, these aren’t necessarily different investors, and this will reflect in part a rotation from mutual funds to the more flexible and transparent ETFs within the market.

Chart 1: Equity US Fund Flows by Asset Type, Q4 2024 to Q1 2025, USD bn

Source: LSEG Lipper

The action, however, is clearly focused on ETFs, with the blue bar on chart 1 overshadowing the rest on most weeks, and so across the period.

Digging deeper into ETF flows does throw up some surprises. For example, the largest outflows (-$27.64bn) in the penultimate week of the period captured are almost matched by the following week’s inflows (+$27.01bn). Overall, however, the US ebullience has ebbed in Q1 2025 when compared with Q4 2024, where the average weekly ETF inflows are positive $16.36bn versus positive $5.5bn, respectively.

Given that sentiment has shifted from greed to fear, the cooling of ardour over US equities isn’t surprising. What is perhaps surprising is that this sentiment seems conditioned by where those ETF assets are domiciled (chart 2). Over Q4 2024, non-US investors allocated three times the amount to Equity US ETFs than their US peers: $159.58bn, compared to $53.12bn. There has been a sea change in Q1 2025, as non-US domiciled Equity US ETFs have shed $84.4bn, while their US domiciled counterparts have taken $155.84bn. For example, the net inflows of the week of March 26 were entirely a US phenomenon (+$38.67bn), with non-US ETFs suffering outflows of $11.66bn.

Chart 2: Equity US Fund Flows by Domicile, Q4 2024 to Q1 2025, USD bn

Source: LSEG Lipper

Are domestic investors backing the motherland in the teeth of adversity? Personally, I’m sceptical: just as there are no atheists in foxholes, there are no patriots in capital markets. The weakening dollar since January may have been an additional push factor on non-US investors, acting with less force on their US peers, but it hardly explains the stronger flows from the later in Q1 2025 compared to Q4 2024.

It would be premature to read too much into these figures: after all, $84bn of redemptions from the world’s largest and most liquid equity market is hardly a rout, and a less-than-5% correction is not a crisis. I make no judgement on where we go from here; there is already more than enough market chatter on the subject. But the shifting sands of investor sentiment over the past two quarters are not a matter of speculation – though what they mean, particularly the bifurcation between US and non-US behaviour, is both fascinating and (to me at least) opaque.

This article first appeared in Investment Week.