Think Diversification and Opportunity

The U.S. equity market has been on a wild ride so far this year, with large-cap stocks that most people own taking a hit. As a result, investor sentiment has flipped from extremely bullish at year-end 2024 to moderately bearish right now.

With that in mind, prudent investors should be thinking about two concepts—diversification and emerging opportunity:

Diversification is a core concept for managing long-term wealth. And in 2025, after two years of hefty stock-market returns (25% per year for the S&P 500), wider diversification is likely to add value to investment portfolios.

Globally, U.S. small- and mid-cap, defensive-value stocks (e.g., Healthcare or Consumer Staples), and foreign stocks are performing relatively well at this point. A standout so far has been European stocks, which have posted double-digit gains through mid-March even as the S&P 500 has dropped into negative territory for the year.

Opportunities might continue to emerge in European markets. Even if they take a breather after their recent runup, Euro stocks seem poised to do relatively well because of changing government fiscal policies that could propel their performance for years to come. Germany is a key driver of European economic growth and stocks. For the past two years, its economy has floundered with global manufacturing in the doldrums. However, a combination of Russian threats and U.S. tariffs could catalyze a new direction for German industry, particularly in defense and infrastructure related industries.

In fact, America’s apparent pullback from the North Atlantic Treaty Organization, forcing Europe to provide its own security, is likely to drive increased investment in defense, infrastructure, and energy across Europe. With a $24 trillion economy and reasonable debt-to-GDP ratios for many economies, Euro nations can afford to make this investment, which is likely to result in higher GDP growth, a stronger currency over the longer term, and an improved profit outlook for European stocks.