More than five years ago, the global pandemic ushered in a new era of risk exhaustion:1 an environment in which heightened macroeconomic uncertainty, volatile inflation, and fluctuating interest rates—a contrast to the conditions of the 2010s—combined to make risk assessment significantly more challenging. The first half of 2025 marked a continuation of this regime, with a series of macroeconomic and geopolitical shocks driving volatility across asset classes, and in some cases upsetting years of steady performance patterns overnight. Against this backdrop, we continue to believe that a factor-agnostic quantitative approach—one that avoids macro exposures and allows idiosyncratic company attributes to drive portfolio risk relative to a benchmark—will benefit investors seeking calmer, stabler patterns of active returns.

The Rapid Unraveling of American Exceptionalism

For the better part of two decades, US outperformance was the defining theme of developed markets. From 2009 to 2024, the S&P 500 saw annualized returns of 13.8% while the MSCI EAFE, which tracks developed countries outside the United States and Canada, saw annualized returns of 5.7%. This represents an average of 8.1% outperformance—a notable departure from prior decades where the two regions delivered comparable annualized returns of approximately 9% each year. Even more remarkable than the average outperformance is the consistency over time: from 2009 to 2024, there were only three years where US stocks underperformed international stocks (2015, 2017, 2022) and in each case, that underperformance was less than 3%.2 The three-year rolling difference between the S&P 500 and MSCI EAFE shows the bigger picture trend: At any given month-end in that fifteen-year window, a three-year buy-and-hold of overweighting US stocks and underweighting international stocks would have resulted in three years of mostly significant outperformance (Exhibit 1). 

 

EXHIBIT 1

Fifteen Years of Consistent US Outperformance …

The Chart Compares Three-Year Rolling Difference of S&P 500 vs MSCI EAFE (%). In this roughly 15-Year period, there was not a single three-year window in which international stocks outperformed U.S. stocks.

As of 30 June 2025
Source: MSCI, S&P 500

By 2024, the term “American Exceptionalism” had become common shorthand for the seemingly unstoppable rise in US stock indices,3 and the lure of these steady double-digit market returns created an extraordinary appetite for passive US products. From 2020 to 2024, nearly $500 billion flowed into passive investment funds tracking the S&P 500, and over half came from 2024 alone (Exhibit 2). Complacent faith in US growth had become so mainstream that T-shirts sporting the phrase “VOO and Chill”—meaning invest in Vanguard’s S&P 500 ETF, sit back, and be rewarded with steady returns4—could be found at Amazon and Walmart.5

EXHIBIT 2

… Created a Flood of Global Demand for Passive US Investment Funds

The Surge in Core Inflation - 1997 to 2023

As of January 2025
Source: eVestment 

But in early 2025, a series of events caused this steady outperformance to give way to volatility. Three in particular caused sudden and sharp market movements during the first two quarters: DeepSeek, Liberation Day, and tariff rollbacks (Exhibit 3).

EXHIBIT 3

2025 Has Seen a Sharp Reversal of US Outperformance

Two years of outperformance reversed in approximately one quarter due to DeepSeek and Liberation Day despite peak during tariff rollbacks.

As of 30 June 2025
Source: MSCI, S&P 500

The first event we highlight is the January announcement that DeepSeek, a Chinese start-up, was making significant strides in AI at a fraction of the cost to US competitors. Because US performance had become so dependent on the meteoric rise of the Magnificent Seven—the largest US tech companies, representing a single sector and particular types of stocks (growth, momentum)—the market was acutely sensitive to any news affecting their global competitiveness. When DeepSeek raised doubts about US tech’s insulation from foreign competition, it sparked a dramatic sell-off. In a single day, the share price of NVIDIA declined 17% and the Nasdaq lost 3%; in a week, the S&P 500 declined 1.5%. The impact could also be seen in the broader tech space. Within a month, the Philadelphia Semiconductor Index (SOX), which tracks the 30 largest American semiconductor companies, unwound almost all of the outperformance it had enjoyed since the end of 2022. While these losses have largely recovered since, DeepSeek marked a major shift away from US stocks. We see this as one of the most meaningful changes in investor appetite for US assets in roughly 15 years.

Volatility continued in the second quarter, this time driven by US trade policy. The 2 April announcement of sweeping tariffs on US trading partners raised concerns about the impact on particular trading partners, companies, and sectors. It also raised concerns over whether the US dollar would keep its status as the reserve currency of the world, and whether Treasury bonds would keep their reputation as the world’s “risk-free” asset.6 Within two days, the S&P 500 declined 10%; one week later, when tariffs were temporarily rolled back, it was up 9.5%. These sharp swings in performance illustrate the dislocation that can occur when the effects of government decisions are uncertain.

There are always market leaders—that is not new. But it is the size of US leaders and the ripple effects of their performance that we view as unusual. Similarly, macro-driven volatility is not new—but in our view, geopolitical uncertainty is a more recent feature behind the rocky performance of the 2020s. So far, US equity markets staged somewhat of a recovery from these events, regaining positive returns for the year during the second quarter. But we have seen a longer-lasting impact on the dollar, which finished the first half of the year down 10%. In our view, this reflects the continued uncertainty surrounding US market dominance. 

Sentiment Swings Are Not Exceptional

This type of volatility is not unique to the US market. The same trend can be found in China, the largest economy in the MSCI Emerging Markets Index, where dramatic swings in investor sentiment have reversed years of underperformance in an exceptionally short period of time.

In the years following the pandemic, China sentiment was decidedly negative. From 2021 to 2024, China’s weight in the MSCI Emerging Markets Index declined from 40% to 25%; demand for ex-China portfolios soared as investors grew increasingly concerned over the country’s path to economic recovery.7 This roughly three-year period of decline was not as well-established as the US market’s fifteen-year period of growth, but the exodus from China did appear to be cementing a longer-term trend.

Starting in 2024, however, this stable pattern gave way to sudden explosive rallies (Exhibit 4). In September of that year, the announcement of a government stimulus package reignited investors’ optimism, and the MSCI China Index surged 33% in the weeks that followed—a move so large it surpassed all other market activity that quarter. Much of that initial excitement faded by year end as investors began to question the stimulus measures’ effectiveness, and in January of 2025, the DeepSeek announcement paved the way for a multi-week surge. The 2 April tariff announcement increased volatility, leading to a roughly 15% decline within five days.

EXHIBIT 4

As in the United States, Rocky China Performance Mirrors Macro News

Cumulative Performance of MSCI China Index 6/28/2024 = 100. Chart shows, in China, there was a 33% surge in weeks after stimulus announcement, DeepSeek provides further boost after growing stimulus skepticism, and Liberation Day triggers decline.

As of 30 June 2025
Source: MSCI

The MSCI China has rebounded as of half-year 2025. But its erratic performance from late 2024 illustrates the market’s acute sensitivity to geopolitical, macroeconomic uncertainty. As an inverse image of the United States, it also illustrates the lost opportunity (rather than increased risk) associated with outsized macro bets—that is, being significantly overweight or underweight a particular country in response to the perceived economic outlook. From the end of June 2024 to May 2025, the MSCI China is up a handsome 30%—meaning investors who significantly reduced or eliminated their exposure to China missed out on a rally. 

As in the United States, we believe China’s rocky performance reflects the fact that investor sentiment (optimism or pessimism) has become more sensitive to macroeconomic and geopolitical developments. While sentiment is difficult to quantify, we believe we can proxy it by monitoring investors’ appetite for riskier stocks—more specifically, by studying the correlation between returns for momentum stocks (the previous top 20% of performers) and returns for risky stocks (stocks that have had dramatic price fluctuations). A strong correlation between returns from momentum and returns from risky stocks can indicate high risk appetite, as investors tend to gravitate toward riskier stocks during periods of economic stability; a negative correlation can indicate low risk appetite, as investors tend to avoid risky stocks (and gravitate to low-risk stocks) when the economic outlook is negative or uncertain. By this measure, investor sentiment in China has tended to follow the broad strokes of macroeconomic and policy changes (Exhibit 5). 

EXHIBIT 5

Investors’ Risk Appetite Tends to Mirror Macroeconomic, Geopolitical News

Correlation between momentum returns and risk returns (%). Steady decline in risk appetite post-pandemic. China stimulus announcement marks the start of a sentiment change.

As of 30 June 2025
Source: Lazard

While sentiment is difficult to quantify, we believe we can proxy it by monitoring investors’ appetite for riskier stocks.

“Up the Stairs, Down the Elevator”

The old adage “up the stairs, down the elevator” is often used to describe how quickly long-term stock market gains can be erased. We believe the phrase applies, too, to the remarkable speed of country, sector, and style leadership rotations in the past year. The dramatic rotations of early 2025—driven largely by US policy volatility—are reflected in two key measures of investor sentiment: the MOVE Index (a measure of expected volatility in government bond yields that has long served as a bellwether of broader risk appetite) and the VIX Index (a measure of expected volatility of the S&P 500, often called the “fear index”). Both the MOVE and VIX indexes have spent most of the risk exhaustion period at higher levels than in the 2010s—a period defined by falling interest rates, stable inflation, and low macroeconomic uncertainty (Exhibit 6). 

EXHIBIT 6

Risk Aversion and Uncertainty Continue

Line graph of ICE BofAML MOVE Index vs Cboe Volatility Index (VIX index).

As of 30 April 2025

Source: Bank of America, Cboe

Core Strength

As we enter the second half of 2025, we expect continued tariff-related volatility, higher long-term interest rates reflecting investors’ concerns over fiscal sustainability, and continued geopolitical uncertainty. Some calm may be restored as tariff impacts become clearer, but we expect macro volatility and geopolitical uncertainty to persist. 

In this environment, we believe aggressive macro bets may add volatility to portfolios rather than drive consistent alpha. We believe a core approach—one that adopts balanced exposures to key investment styles and other factors while controlling benchmark-related risk exposures—can promote more consistent performance in any market environment. In the years ahead, this approach may appeal to investors seeking stability amid the unpredictable return patterns that have come to define the risk exhaustion era.

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The Risk Exhaustion Regime Continues

Investment Research


Notes
1 Risk Exhaustion: Navigating the New Regime (Lazard, December 2023)
2 FactSet as of 30 June 2025
3 Has the Era of “American Exceptionalism” Ended? (Haver Analytics, March 2025) and How the Reversal of the ‘American Exceptionalism’ Trade Is Rippling Around the Globe (Wall Street Journal, March 2025)
4 ‘VOO and Chill’: Should Investors Rely on Just the S&P 500? (US News, May 2025)
5 VOO and Chill T-Shirt (Amazon);  VOO and Chill T-Shirt (Walmart)
6 Lessons From Financial Markets Since Liberation Day (Council on Foreign Relations, July 2025)
7 Investors pile into emerging-market funds that cut out China (Financial Times, October 2024) 

 

Important Information
Published on 21 August 2025.

Information and opinions presented have been obtained or derived from sources believed by Lazard Asset Management LLC or its affiliates (“Lazard”) to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the published date and are subject to change.

The performance quoted represents past performance. Past performance is not a reliable indicator of future results.

Allocations and security selection are subject to change.

Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio or that securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio.

Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Small- and mid-capitalization stocks may be subject to higher degrees of risk, their earnings may be less predictable, their prices more volatile, and their liquidity less than that of large-capitalization or more established companies’ securities.

A quantitative investment strategy relies on quantitative models and quantitative filters, which, if incorrect, may adversely affect performance.

The Chicago Board Options Exchange Volatility Index (VIX) shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 Index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk.

The ICE BofA MOVE Index is a yield curve weighted index of normalized implied volatility on one-month Treasury options.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free-float-adjusted market capitalization index that is designed to measure developed market equity performance, consisting of developed market country indices excluding the United States and Canada.

The MSCI Emerging Markets Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI Emerging Markets Index consists of emerging markets country indices including: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.

The MSCI China Index is constructed based on the integrated China equity universe included in the MSCI Emerging Markets Index, providing a standardized definition of the China equity opportunity set. The index aims to represent the performance of large- and mid-cap segments with H shares, B shares, red chips, P chips and foreign listings (e.g., ADRs) of Chinese stocks.

The PHLX Semiconductor Sector is a capitalization-weighted index comprising the 30 largest US-traded companies primarily involved in the design, distribution, manufacture, and sale of semiconductors.

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