Record Foreign Buying of US Equities
TREE NEWS reports: Foreign investors poured a net $942 billion into US stocks and investment fund shares over the 12 months through July, the highest rolling annual total since records began in 1985. The surge, revealed in US Treasury data, marks an unprecedented wave of overseas demand for American equities, even as appetite for US bonds cools. In the second quarter alone, net purchases of US stocks jumped to $426 billion, a 62% year-over-year increase and a new quarterly record, surpassing the previous high of $299 billion set in 2022.
Monthly data show buying accelerated through the spring: $110 billion in April, $182 billion in June, before slowing sharply to just $3.7 billion in July. Despite the July pullback, foreign investors remained net buyers for a sixth consecutive month. The inflows coincided with a strong rally in US equities; the S&P 500 gained about 20% over the 12 months through July, with technology names like SanDisk, Western Digital, and Intel leading. The index rose 14.9% in the second quarter alone—its best quarterly performance since 2020—after briefly plunging on the outbreak of war with Iran.
Drivers Behind the Surge
Brad Setser, a senior fellow at the Council on Foreign Relations, attributed part of the second-quarter spike to delayed execution of weaker first-quarter buying. But the broader trend, he noted, is a sustained record pace of foreign purchases of US stocks. Setser highlighted South Korea as a key driver: as Samsung, SK Hynix, and other local tech giants soared, Korean investors hit concentration limits and were forced to diversify into global assets, primarily US equities.
“You rarely see South Korea sending over $200 billion in one direction into global equities, and most of it goes to the US,” Setser said. “This shift in capital flow patterns aligns closely with the extraordinary inflows against the backdrop of the dollar.”
Bond Demand Weakens, Raising Concerns
The flip side of the equity boom is a notable cooling in foreign demand for US Treasuries. In the second quarter, net purchases of US bonds fell to $188 billion, down from $314 billion in the first quarter. Setser warned that this trend could pressure US debt financing at a time when the fiscal deficit is already widening. “It feels like the whole world is extremely bullish on US stocks,” he said.
For the bond market, the shift is not a positive signal. As overseas demand tilts toward equities and away from Treasuries, the US government—already issuing massive amounts of debt—will need to rely more on domestic buyers or accept higher borrowing costs to absorb supply.
Market Implications
- US equities: Continued foreign inflows provide a powerful tailwind, particularly for large-cap tech and growth stocks. However, the sharp July slowdown suggests flows can be volatile and sensitive to currency and valuation shifts.
- Treasuries: Weakening foreign demand could push yields higher, steepening the curve and raising borrowing costs for the government and corporations. This may also weigh on the dollar if foreign investors diversify away from US fixed income.
- Dollar: The dollar’s trajectory will depend on whether equity inflows outpace the retreat from bonds. A sustained shift could lead to a more volatile currency.
- Emerging markets: South Korea’s forced diversification illustrates how local equity booms can drive capital outflows, potentially pressuring emerging market currencies and assets.
- Crypto and commodities: While not directly impacted, a stronger US equity market and rising bond yields could influence risk sentiment. Crypto, often correlated with tech stocks, may benefit from the risk-on mood, while commodities could face headwinds from a stronger dollar.
Key Takeaways for Investors
- Foreign demand for US stocks is at a historic high, providing structural support for equities.
- The divergence between equity and bond flows signals changing global risk appetite and could lead to higher US borrowing costs.
- Watch for shifts in Asian investor behavior, particularly from South Korea, as a barometer of global capital flows.
- Portfolio diversification remains crucial; concentration in US assets may expose investors to reversal risk if flows slow.
