Introduction: The Challenge of Managing Risk in Today’s Markets

For much of 2024, US equities outperformed their European counterparts by a wide margin. The S&P 500 gained nearly 24%, while the MSCI Europe index returned just 8.6%. But as 2025 began, that narrative started to shift—European markets surged, outpacing the US in the first two months of the year.

For investors managing significant wealth, this raises a risk management dilemma. Should you continue favoring US equities, or is it time to increase European exposure? More importantly, how do you structure your portfolio to reduce risk while maximizing long-term returns?

This isn’t about chasing short-term performance. It’s about understanding where risk lies, how to manage volatility, and how to position capital effectively.

Let’s analyse what’s driving this shift—and what investors need to do next.

Why US Stocks Dominated in 2024

1. Economic Strength and Market Leadership
2. Structural Market Advantages
3. Global Capital Flows Favouring the US

• US GDP growth outpaced Europe, supporting stronger corporate earnings.
• Risk management in US markets benefited from a diversified economy and resilient consumer spending.
• Tech stocks, which make up 32% of the S&P 500, were a key driver of growth.
• High-profit margins (13.1%) vs. Europe’s 10.1% gave US corporations greater financial flexibility.
• Risk-adjusted returns in the US remained more attractive, drawing in global investors.
• The US accounted for 50% of global venture capital, fueling future growth.

For most of 2024, investors who prioritized risk management saw the US as the safer bet. But the landscape has changed.

Why European Stocks Are Outperforming in 2025

1. The Valuation Gap Created an Opportunity
2. Shifting Interest Rate Expectations
3. Sector Rotation and Market Cycles
4. Geopolitical Sentiment Improving

• By early 2025, European stocks were trading at their biggest discount vs. US equities in 30 years.
• Risk-conscious investors recognized that this deep undervaluation presented a buying opportunity.
• Lower rates in Europe could boost earnings, supporting risk mitigation strategies in diversified portfolios.
• A weakening US dollar also increased international stock appeal.
• Financials (Europe’s largest sector at 22%) gained ground as tech stocks cooled.
• Risk-adjusted performance metrics now favor a more balanced approach across regions.
• Potential ceasefire negotiations in Ukraine and the Middle East reduced uncertainty.
• Managing geopolitical risk has become a key factor in European market recovery.

The lesson? Risk management requires flexibility—investors who adapt to shifting market conditions are best positioned to protect and grow their wealth.

What This Means for Investors: Risk Management in a Changing Market

Investors often fall into the trap of assuming past performance will continue indefinitely. But history tells a different story.

Between 2000 and 2009, US equities lost value, while emerging markets nearly doubled. Investors who failed to adjust their risk strategy missed out on an entire decade of growth.

Key Risk Management Takeaways:

✅ Overexposure to US stocks could be risky. If European equities continue to recover, investors who remain too US-focused may underperform.

✅ Valuations matter. US stocks are expensive, while European equities offer higher upside potential relative to risk.

✅ A globally diversified portfolio reduces volatility. The best risk management strategy isn’t about choosing between the US and Europe—it’s about structuring a portfolio that thrives in any market.

Risk Management Strategy: How to Position Your Portfolio Now

Step 1: Reassess Regional Exposure

• If you’re overweight US equities, consider shifting some capital into European markets.
• Ensure you’re not taking unnecessary risks by chasing recent performance trends.

Step 2: Balance Growth and Value

• The US tech sector is still strong, but valuations remain high.
• European stocks, particularly financials and industrials, offer better risk-adjusted return potential.

Step 3: Consider Currency Risk

• A weaker US dollar could make international holdings more attractive.
• Hedging against currency fluctuations can be an effective risk reduction tool.

Step 4: Maintain Diversification

• Risk management isn’t about choosing winners and losers—it’s about resilience.
• A portfolio that includes both US and European equities is better positioned to handle volatility.

Conclusion: Managing Risk to Maximize Wealth

The past year has been a masterclass in why risk management matters.

• US equities delivered outstanding returns in 2024, but valuations are stretched.
• European stocks have started outperforming in 2025, driven by deep discounts, rate expectations, and improved sentiment.
• Investors who remain too focused on past winners risk missing the next cycle of opportunity.

Rather than betting on one region over the other, the best risk management strategy is a balanced approach. The investors who succeed in the next decade won’t be the ones who try to time every market shift—they’ll be the ones with a strategy that works no matter what happens next.

The key to managing risk in volatile markets isn’t reacting to headlines. It’s making decisions based on what actually builds and protects wealth over time.