Smart Money Flow Type: Where is the money going? Wall Street funds are shifting dramatically from US stocks, triggering a dollar alert. Will $BTC and $ETH be the next safe havens?

Market analysis indicates that the U.S. stock market is caught in an awkward paradox: while capital inflows have reached record levels, relative returns have fallen to a fifteen-year low. A report from Deutsche Bank reveals this phenomenon and warns that if this capital flood reverses, the dollar could face severe downside pressure.

Data shows that net capital inflows into U.S. stocks last year amounted to 2% of the U.S. GDP, an unprecedented level. This massive capital alone is enough to cover two-thirds of the U.S. current account deficit. Not only are foreign investors aggressively buying in, but domestic funds also show a strong “home bias,” with little interest in purchasing foreign stocks. Among major developed countries, the U.S. is almost the only nation consistently attracting net stock inflows.

However, this capital feast has not led to a corresponding feast in returns. Looking back, this concentrated betting now seems ill-timed. Over the past year, the game has changed. The leading performers are no longer U.S. stocks but other markets with lower valuations and more cyclical characteristics. U.S. stocks are neither cheap nor cyclical. Their underperformance relative to global assets has not been seen in the past fifteen years. Even extending the timeframe to three years, U.S. stock performance has fallen to recent lows.

This rotation is rooted in a strong global macro backdrop. The momentum of better-than-expected global economic data has persisted for over a year, marking the second-longest continuous positive cycle on record. Positive economic data typically coincide with global stock market rallies. The current environment is especially favorable for companies, with global corporate profits growing at over 15%—a pace usually seen only during recovery phases after recessions or at specific macro stimulus points.

Faced with the worst relative performance in fifteen years and initial positions already overweight in U.S. stocks, long-term investors have ample reason to reassess their asset allocations. The key premise for capital shifting is that other regions’ markets must be capable of keeping pace with or surpassing U.S. stocks. Currently, this premise is not only valid but quite convincing.

First is the potential for valuation reversion. Although the gap has narrowed over the past year, U.S. stocks still trade at a 40% premium to non-U.S. markets, well above historical norms. The more critical catalyst is a shift in earnings fundamentals. Over the past fifteen years, non-U.S. corporate profits have stagnated, while U.S. earnings have nearly doubled. But now, non-U.S. profits have surged 14% in the last six months, showing a significant upward trend.

Of course, this convergence has its limits. The return on equity for U.S. companies remains far higher than in other regions, and this structural profitability gap suggests valuations cannot fully align. However, analysis suggests that a reduction of the U.S. valuation premium to a reasonable 20-30% is possible. Additionally, U.S. companies are undertaking record capital expenditures; if these investments do not translate into high returns, it could weigh on future earnings.

If capital begins to withdraw due to declining valuation attractiveness of U.S. stocks, the forex market will inevitably be impacted. There are clear historical precedents. Since the late 1990s tech bubble burst, starting in 2002, U.S. stocks significantly underperformed global markets, leading to a sharp shift to net outflows from U.S. equities and a prolonged dollar depreciation cycle.

While current declines may not fully replicate those past declines—since at that time China and emerging markets experienced epic booms—the direction of capital flows remains highly instructive. Over the long term, the dollar’s trajectory is closely correlated with U.S. performance relative to emerging markets.

The macro logic is now clear: with high valuations and lagging earnings, if record foreign investment in U.S. stocks halts or reverses, and capital shifts to emerging markets and other regions, the dollar’s support—accounting for 2% of GDP—will weaken, triggering a downside alert. For investors seeking diversification, cryptocurrencies like $BTC and $ETH may become options to watch in this potential capital migration.