US stocks are dominating their peers in Europe and Asia to an “unprecedented” degree, says JPMorgan. But the firm warns that’s an unsustainable situation.

To best understand just how rare the ongoing divergence is, consider that momentum for US and European stock prices have only gone in different directions twice in the past 20 years. And as it stands right now — and as the chart below reflects — when Europe is combined with Asia, the momentum split is the widest it’s ever been.

JPMorgan QDS

Before we get into what this means for the future of global stocks, let’s first assess what’s led us to this situation in the first place.

JPMorgan‘s quant guru, Marko Kolanovic— a man whose opinion is valued so highly that it can move markets — says the combination of share buybacks, comparatively tight monetary conditions from the Federal Reserve, and a strong dollar resulting from President Donald Trump’s trade war are the main fundamental factors driving US outperformance.

On the technical side of things, Kolanovic attributes the divergence to low liquidity — which creates bigger asset moves — and price-insensitive systematic flows for investors that are long US stocks and short Europe and emerging markets (EM).

With that established, one of two things can happen from here, according to Kolanovic, who is JPMorgan’s global head of quantitative and derivatives strategy.

The first scenario, which he calls “risk on, USD down,” would involve EM and value assets staging a rally and the US dollar declining — all while US stocks continue higher, but at a slower pace than their international peers.

The second, which he calls “risk off, USD up,” would involved US markets selling off and closing the gap between Europe and EM. Kolanovic surmises this could result from a continuation of the trade war at its current pace, which would keep the greenback rising.

So which one is most likely?

“We think that the more likely outcome is a ‘risk on’ convergence, given decent global growth, cheaper valuations outside of the US, a continuation of buybacks in the US, intensified criticism of rate hikes and strong USD by US administration, new stimulative measures in China, and ongoing negotiations to resolve trade war with China,” Kolanovic said.

“A ‘risk on’ convergence could be further fueled by poor liquidity and a short squeeze in currencies (EUR and EM FX), metals (precious and industrial), broad EM equities and China stocks,” he continued.

Yet while US stocks may very well stay in decent shape if this is the outcome, Kolanovic argues they’ll still start to lag the European, Asian, and EM peers they’ve so thoroughly dominated.

So if you’re seeking the next big thing in stocks, perhaps a rotation of sorts is in order.

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