US equities edge higher as foreign inflows reaccelerate

Just a few weeks ago, it looked like global investors were falling out of love with American markets. After years of flooding into U.S. equities, the money started to trickle elsewhere. Between December and April, global stock funds excluding the U.S. attracted a record $2.5 billion - most of it in just three months. 

Trump’s turbo-charged tariffs and rising political unpredictability spooked markets, and with portfolios already bloated with Big Tech, some argued the pullback was overdue.

But just as the smart money seemed to be diversifying away, here comes the twist: the S&P 500 is now storming back toward a record high, and foreign investors are once again piling into U.S. assets at near-record pace. 

So, what’s really going on? Is this a vote of confidence in American resilience - or is the rally resting on narrow shoulders and borrowed conviction?

Global market trends: Foreign capital inflows resurging

According to Bank of America, foreign purchases of U.S. assets are on track to hit $138 billion this year - the second-largest annual haul ever. Equity funds are leading the charge, with $136 billion of that headed into stocks, suggesting global investors are warming back up to risk.

Zoom out a bit, and the picture becomes even more striking: since 2020, overseas buyers have poured a whopping $547 billion into U.S. markets - roughly $350 billion of that into equities alone. For all the talk of diversification and global rotation, the gravitational pull of Wall Street is proving hard to resist.

So, why the change of heart?

Chaos, confidence and investor psychology

The answer may lie in a blend of relative strength and global uncertainty. While the U.S. has its fair share of economic and political drama, trade tensions, ballooning deficits, immigration crackdowns, it’s still seen as a safer bet than many of its peers. 

Europe remains sluggish, China’s post-COVID rebound is losing steam, and emerging markets are battling inflation and currency risk. Add to that a cooling inflation story and softer-than-expected tariff impacts, and you’ve got a market that, while wobbly, still stands taller than most.

There's also the matter of investor psychology: when the world looks shaky, money often heads to where it feels most familiar - and liquid. For global allocators, that usually means U.S. stocks.

A rally carried by Magnificent 7 stocks

But before we get too carried away, let’s look under the bonnet. This rally isn’t being fuelled by a broad swathe of the market - it’s being carried by a very short list. 

Strip away the so-called Magnificent 7, Microsoft, Apple, Amazon, Nvidia, Tesla, Meta and Alphabet, and the market’s performance looks far less heroic. In fact, without them, the S&P 500’s rally since April would be nearly cut in half. In 2024, the Magnificent 7 grew so large they nearly matched the entire stock markets of the UK, Canada, and Japan combined.

The equal-weighted S&P, which treats all companies the same regardless of size, is still nearly 5% off its record high. That tells us something: most stocks aren't flying. Just the biggest ones are.

This kind of concentration isn’t new - it’s been a feature of U.S. markets for years. But it does raise the risk profile. If even one of these tech titans stumbles, the whole index could wobble. In a sense, investors aren’t banking on America as a whole - they’re doubling down on a handful of high-octane names they know.

Bond outflows, risk on sentiment

And it’s not just about what’s going in - it’s also about what’s coming out. Recent data from Morningstar shows U.S. bond funds have seen $43 billion in outflows, as investors shift away from defensive positions and back into equities. It’s a classic risk-on move, signalling renewed appetite for growth - or at least the returns that come with it.

This rotation may look brave, but it’s not necessarily irrational. With inflation cooling and the Fed keeping rates steady for now, yields have stopped climbing. Meanwhile, stocks, especially tech, offer a shot at real upside, even if valuations are stretched.

S&P 500 outlook: Is this the real thing or a head fake?

So, is this a real resurgence or just another mirage? That depends on whether you see the glass as half full or strategically positioned beneath a leaky pipe, according to analysts.

On one hand, foreign capital is a powerful tailwind, and history shows that such inflows can fuel sustained rallies. But on the other hand, the market’s gains are disproportionately reliant on a few mega-cap stocks, and the structural concerns, debt, geopolitics, policy whiplash, haven’t vanished.

At the time of writing, the S&P 500 has seen a significant retreat. A downside bias is evident on the daily chart, though volume bars show almost even sell-side and buy-side pressures, hinting at potential price consolidation. 

Should the S&P 500 see an uptick, prices could encounter resistance at the $6,075 and $6,144 levels. On the other hand, should the S&P 500 see a further slump, prices could be held at the $5,790 and $5,550 support levels. 

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