Can international diversification benefits be accessed in a tax-efficient way?

The U.S. equity market faces significant risk due to its heavy concentration in artificial intelligence, now exceeding 50% of S&P 500 market cap. This concentration, coupled with elevated earnings expectations and the Fed's interest rate sensitivity, makes the market vulnerable to shocks. Private markets also show similar AI-driven buildout and debt issuance.

Developed markets outside the U.S., like Europe and Japan, offer better diversification. Their markets are less concentrated and benefit from improved bank profitability and increased defense spending. However, rebalancing is complicated by embedded capital gains in U.S. holdings, potentially triggering large tax bills.

Active tax management, including tax-loss harvesting, is crucial for navigating these challenges. Opportunities for this strategy are comparable in international stocks as in the U.S. This can help investors diversify and generate losses to offset gains, even though current platforms heavily favor U.S. equity.