(Bloomberg) -- Investor diversification away from US equities will power on in 2026, driving a further 10% gain for a benchmark global stock index, according to Citigroup Inc. strategists.

A key reason for this is a growing convergence between earnings in America and the rest of the world, the team led by Beata Manthey wrote in a note. Improvements in earnings per share remain possible in key markets outside the US, through government spending in Europe, reflation in Japan and widespread artificial intelligence adoption.

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“Investors are now showing greater confidence in international equities, with current positioning significantly more bullish rest of the world versus the US, and risk appetite generally broader than a year ago,” the Citi team said.

Manthey made a contrarian call in late 2024, upgrading continental European stocks to overweight. The Stoxx 600 index ended up notching its strongest annual performance since 2021 last year, outpacing the S&P 500 in dollar terms.

Manthey and her team see the MSCI AC World Index ending the year at 1,360 points, about 10% higher than Friday’s close. Diversification doesn’t mean explicitly selling the US, the team notes, with Citi predicting an 11% gain in the S&P 500 index in 2026.

While all major equity markets are trading with valuations above their historical averages, US stocks are the most expensive, according to the Citi team. They trade at 22 times forward earnings, in the 91st percentile over the past 25 years. Global equities are in the 90th percentile.

Even with recent discussions around the end of so-called “US exceptionalism,” flows data point to only a modest rotation up to now. While Europe had its first year of inflows since 2018, this reversed less than 10% of previous outflows, the strategists said.

“Against a shifting earnings backdrop, the longer-term flow setup remains supportive of the diversification story,” they wrote.

The team is overweight on emerging markets and Europe excluding the UK, neutral on the US and Japan and underweight the UK and Australia. Preferred global sectors include tech, financials and health care, while consumer sectors are underweight.

--With assistance from Michael Msika.

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