“Sell America?” Careful there. | Barron's Streetwise

Key Concepts

• Sell America Trade: The concept of reducing allocation to US equities in favor of international markets, driven by valuation concerns, geopolitical risks, and potential policy shifts.
• Valuation Z-Scores: A statistical measure comparing current valuations to historical averages (20-year in this case) to assess overvaluation or undervaluation.
• Growth vs. Value: Investment styles focusing on companies expected to grow rapidly (growth) versus those considered undervalued (value). The relationship between these styles and US/Europe performance is discussed.
• Four Tiers of Fear: A framework developed by Lori Calvasina to categorize market drawdowns based on severity and potential policy response.
• Geographical Diversification: A strategy of spreading investments across different countries and regions to reduce risk.
• MAG 7: Refers to the seven largest US technology companies (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta).
• AI Jitters: Concerns surrounding the impact of Artificial Intelligence on earnings growth, financing, and valuations.

The "Sell America" Trade and US Market Outlook for 2026

This discussion centers around the increasing talk of a “Sell America” trade, analyzing its potential motivations and implications for US equity markets in 2026. Lori Calvasina, Head of US Equity Strategy at RBC, provides insights into the nuances of this concept, differentiating between literal selling and strategic allocation shifts.

Understanding the "Sell America" Trade

The “Sell America” trade isn’t necessarily about betting against the US economy or stock market. Instead, it represents a potential shift in investor allocations, driven by several factors. Calvasina explains it can manifest as:

• Literal Selling: Reducing holdings in US stocks and other US assets.
• Allocation Shifts: Reducing overweight positions in the US relative to other markets (Europe, emerging markets). This doesn’t mean eliminating US exposure, but moderating it.
• Concerns over Policy: Anxiety regarding policy changes (tariffs, Fed independence, geopolitical events like the Greenland situation) and their potential negative impact on US markets.

Valuation Analysis & Relative Performance

RBC’s analysis reveals that US valuations, while strong, are relatively elevated compared to other developed markets like Australia and Canada, based on 20-year z-scores. Europe, conversely, appears modestly undervalued. This suggests a potential for relative outperformance by international markets. Specifically, in 2025, developed markets ex-US outperformed the US.

Calvasina highlights a historical relationship between growth/value performance in the US and relative performance of the US versus Europe:

• US Growth Outperformance = US Outperformance: When growth stocks outperform value stocks in the US, the US market generally outperforms Europe.
• US Value Outperformance = Europe Outperformance: Conversely, when value outperforms growth in the US, Europe tends to outperform.

This relationship, which had been disrupted in recent years, suggests a potential for Europe to outperform if the US experiences a shift from growth to value.

Framework for Understanding Market Drawdowns: The "Four Tiers of Fear"

Calvasina introduced a framework for understanding market drawdowns, categorized into four tiers:

• Tier 1: Garden Variety Pullback (5-10%): Common and typically doesn’t escalate further. Examples include pullbacks in August 2024 and 2023.
• Tier 2: Growth Scares (14-20%): Associated with concerns about economic growth, potential recessions, or systemic risks. Examples include 2010-2011, 2015-2016, 2018 (tariff episode), and 2025 (tariff episode). These often trigger a “whiff of panic.”
• Tier 3: Recession or Major War (Around 34%): Significant drawdowns, like those experienced during the tech bubble and the Global Financial Crisis (GFC). Often accompanied by substantial policy responses.
• Tier 4: Extreme Events (50% or greater): Rare, catastrophic events like the tech bubble burst and the GFC.

This framework emphasizes that market reactions to geopolitical risks can be delayed, as seen during WWII and the initial stages of the COVID-19 pandemic. Markets often “wait and see” before reacting decisively.

Policy Maker Influence & the "Trump Put"

The discussion explores the possibility that policymakers are sensitive to stock market performance and may adjust policies to avoid significant market declines – a concept referred to as a “Trump put” or “administration put.”

The 2025 tariff episode illustrates this dynamic. Initial market negativity prompted some flexibility from policymakers, although the market ultimately experienced a larger drawdown (18.9%) than anticipated. Calvasina notes that policymakers responded to the tariff concerns, and the market recovered quickly, faster than previous “growth scare” episodes.

Investment Strategy: Geographical Diversification & Sector Rotation

Calvasina suggests that if investors are considering reducing US exposure, they should focus on:

• Geographical Diversification: Increasing allocations to international markets, particularly Europe.
• Sector Rotation: Shifting away from growth-oriented, AI-driven sectors within the US towards more value-oriented sectors. She notes that European investors have been actively seeking exposure to these areas.
• Focus on Earnings: Pay close attention to corporate earnings reports, as they provide a micro-level perspective that can offset macro concerns. Initial bank earnings reports were mixed but didn’t reveal significant red flags regarding the overall economy.

Geopolitical Risk & Market Patience

The conversation touches on how markets price geopolitical risk. Calvasina references historical examples (WWII, Iran situation, COVID-19) to illustrate that markets often exhibit patience and delay reacting until the situation unfolds. She highlights the importance of understanding the anatomy of drawdowns and avoiding panic selling.

Conclusion

While the US economy and earnings growth remain strong, the “Sell America” trade reflects growing investor concerns about valuations, policy risks, and the potential for relative outperformance by international markets. A strategic approach involving geographical diversification, sector rotation, and a focus on earnings fundamentals is recommended. The framework of “Four Tiers of Fear” provides a useful lens for understanding and navigating potential market drawdowns. Ultimately, the discussion emphasizes the importance of a nuanced perspective and avoiding knee-jerk reactions to geopolitical events.