After an extended period of robust performance by US equities, particularly in the technology sector, a significant shift is underway in global financial markets. International stocks have begun to demonstrably outperform their domestic counterparts, challenging long-held investment strategies and re-emphasizing the critical role of diversification in today's complex and volatile global economic landscape. This resurgence of non-US markets signals a potential rebalancing of investment opportunities and necessitates a careful re-evaluation of portfolio allocations by investors worldwide.
This emerging trend carries immediate and profound implications. For years, a "home country bias" has led many investors to heavily favor their domestic markets, often overlooking the vast opportunities and risk mitigation benefits offered by a truly global portfolio. The recent outperformance serves as a stark reminder that market leadership is cyclical and that a diversified approach is not merely an option but a strategic imperative to navigate the inherent uncertainties and capture growth across varied economic cycles and geographic regions.
A Global Rebalancing: What Happened and Why It Matters
The shift in market dynamics has been both swift and pronounced throughout 2025. As of August 22, 2025, the MSCI ACWI ex US Index, a key benchmark for global equities excluding the United States, has delivered approximately twice the return of the S&P 500 (SPX), and notably, with lower accompanying volatility. Digging deeper into the data, the MSCI EAFE Index, which tracks developed markets outside the US and Canada, surged by an impressive 25.2% year-to-date by late August, significantly outpacing the S&P 500's (SPX) 10.9% gain over the same period. European markets, in particular, have shown remarkable resilience, with European shares climbing 12% in 2025 while US shares experienced a 7% decline. Even emerging markets have demonstrated outperformance against the S&P 500 (SPX) during this period.
This trend marks a dramatic departure from the previous decade, where US technology giants and growth stocks largely dominated global returns, leading to a perception that international investments were lagging. The current reversal began to solidify in early 2025, with global equities recording a 7.2% year-to-date return by February 19, surpassing the S&P 500's (SPX) 4.5% gain at that time. Key players in this shift include a broad array of companies within developed and emerging international markets, benefiting from a confluence of macroeconomic factors.
Several intertwined factors are fueling this international resurgence. Firstly, attractive valuations are playing a pivotal role. Non-US stocks are currently trading at significantly more appealing price-to-earnings ratios compared to their US counterparts, which are widely considered to be relatively expensive, with US market valuations on forward earnings at their highest relative to the rest of the world since at least 1988. Secondly, a weakening US dollar has provided a direct tailwind for US investors holding international assets, boosting their returns when converted back to the stronger local currency. This dollar depreciation is influenced by US policy volatility and expectations of slower US economic growth, with projections suggesting a continued weakening dollar could add an estimated 1.1 percentage points to international stock returns over the next decade.
Furthermore, a divergence in interest rate policies has contributed to the landscape. The "higher-for-longer" interest rate stance in the US has exerted pressure on its domestic market, while simultaneously leveling the playing field for foreign markets that previously benefited less from the ultra-low-interest-rate environment that predominantly favored growth-oriented US equities. The sectoral composition also differs significantly; international markets have greater exposure to value-oriented cyclical sectors such as financials, materials, industrials, and energy. This contrasts sharply with the US market's heavy concentration in technology and growth stocks. This value tilt is proving advantageous in an environment of elevated inflation and interest rates, which many anticipate as the "new normal." Finally, healthier economic and earnings cycles abroad are a contributing factor. While the S&P 500 (SPX) has seen an upward trend in downward earnings revisions for future quarters, reminiscent of past crises, earnings estimates for non-US developed-market companies (MSCI EAFE Index) have generally continued to rise within a normal range, signaling more robust underlying economic health outside the US.
Reshuffling the Deck: Winners and Losers in a Diversified World
The recent outperformance of international stocks is creating clear winners and posing challenges for those heavily concentrated in domestic assets. Companies with significant international exposure are naturally among the primary beneficiaries. This includes multinational corporations based outside the US, particularly those in Europe and Asia, which are seeing their stock values climb as their local markets surge. Additionally, value-oriented cyclical sectors such globally diversified banks (e.g., HSBC Holdings plc (LSE:HSBA)), industrial conglomerates (e.g., Siemens AG (XTRA:SIE)), and commodity producers (e.g., Rio Tinto Group (LSE:RIO)) are experiencing a boon. These companies, more prevalent in non-US indices, thrive in environments of higher inflation and stable global economic growth, which are currently characterizing many international markets. Their healthier earnings cycles and attractive valuations are drawing significant investor interest, leading to increased capital inflows and upward price momentum.
Conversely, purely domestic US companies, especially those with little to no international revenue exposure, might be considered relative losers in this scenario. While not necessarily declining in absolute terms, their underperformance relative to international peers means they are losing ground in terms of overall portfolio contribution. Furthermore, overly concentrated portfolios in US growth and technology stocks, which dominated the last decade, are experiencing a recalibration. While some tech giants remain formidable, the broader basket of US growth stocks is feeling the pressure from higher US interest rates and less favorable comparative valuations, leading to slower growth or even modest contractions compared to the robust international expansion. Investors with a strong "home country bias," who previously benefited from US market dominance, are now seeing the opportunity cost of their undiversified approach.
The impact also extends to asset managers and fund providers. Those with a strong focus on international and emerging market funds are likely to see increased inflows and better performance metrics, bolstering their market position. Conversely, funds heavily weighted towards US large-cap growth may face redemption pressures or underperform their global benchmarks. This trend also benefits currency-hedged international funds, as a weakening US dollar enhances returns for American investors. For individual investors, the "winners" are those who maintained a globally diversified portfolio, whose foresight is now being rewarded with stronger overall returns and reduced portfolio volatility. The "losers" are those who missed the opportunity to participate in this international upswing, facing potentially lower overall returns and a higher concentration of risk in a single market.
Global Currents: Industry Impact and Broader Implications
This shift in market leadership is not merely a short-term blip; it reflects deeper, structural changes in the global economic landscape, signaling broader industry implications. The renewed focus on international equities integrates seamlessly into a broader trend of global economic rebalancing and multipolar growth. For years, the US economy, driven by innovation and a strong dollar, served as a primary engine for global growth. However, with the rise of robust economies in Europe, Asia, and emerging markets, and the increasing interconnectedness of global trade, economic momentum is becoming more distributed. This event underscores that sustainable growth often requires looking beyond any single national boundary.
The ripple effects extend across various sectors. For instance, manufacturing and raw materials industries, which are more heavily represented in international markets, could see sustained demand and pricing power as global industrial activity expands. This could lead to increased capital expenditure and job growth in these regions, further fueling their stock market performance. Conversely, highly saturated or domestically focused US sectors might experience increased competitive pressure as global alternatives gain favor. From a regulatory and policy perspective, this trend could encourage international trade agreements and cross-border investment incentives, as governments recognize the mutual benefits of a more integrated global financial system. Policies that promote capital flow and reduce barriers to international investment could gain traction, fostering an even playing field for global market participation.
Historically, periods of US market outperformance have often been followed by periods where international markets take the lead, demonstrating the cyclical nature of market leadership. The current situation bears some resemblance to the early 2000s, following the dot-com bubble, when non-US markets significantly outperformed a struggling US equity market for several years. Similarly, during the mid-to-late 1980s, Japanese and European markets were formidable contenders to US dominance. These historical precedents serve as a potent reminder that market leadership is rarely permanent and diversification is a long-term strategy, not a tactical trade. The current outperformance reinforces the idea that diversification offers a crucial hedge against the idiosyncratic risks of any single country's economy or market, protecting investors from prolonged periods of underperformance in one region.
The Road Ahead: What Comes Next
Looking ahead, the recent outperformance of international stocks presents a dynamic outlook for investors, characterized by both opportunities and challenges. In the short term, we are likely to see continued attention on international markets as investors adjust their portfolios. Capital flows may increasingly shift from US-centric funds to globally diversified or region-specific international funds, particularly those focused on Europe and select emerging markets. This could further bolster the performance of non-US equities and potentially narrow the valuation gap that currently exists. However, short-term volatility stemming from geopolitical events, currency fluctuations, or shifts in central bank policies, particularly regarding interest rates, could still influence market movements, requiring investors to remain agile.
In the long term, this trend could catalyze significant strategic pivots. Asset allocators and institutional investors may increase their target allocations to international equities, recognizing the potential for more balanced global growth and the imperative of risk mitigation. For individual investors, this means a continued emphasis on reviewing and rebalancing portfolios to ensure adequate exposure to non-US markets, moving away from an excessive home country bias. This shift also opens up market opportunities in sectors that are more prominent internationally, such as industrials, financials, and materials, which may offer more compelling growth prospects and better value than their US counterparts in the coming years.
Potential scenarios and outcomes include a continued, more balanced global market, where US and international markets take turns leading, or even a sustained period of international outperformance if factors like attractive valuations and a weakening dollar persist. A less likely but still possible scenario is a rapid reversion to US dominance, though current economic and valuation signals suggest otherwise. Investors should prepare for a world where global diversification is not just a theoretical best practice, but a practical necessity for achieving stable, long-term returns. The ability of companies to adapt to diverse international regulatory environments and capitalize on unique regional growth opportunities will also be a key differentiator, influencing which businesses thrive in this evolving landscape.
Conclusion: The Enduring Wisdom of Diversification
The recent and pronounced outperformance of international stocks over their US counterparts in 2025 serves as a powerful and timely reminder of the enduring wisdom of diversification. It underscores that market leadership is cyclical, not perpetual, and that economic growth drivers are increasingly globalized. The key takeaway from this event is clear: a portfolio concentrated solely in domestic assets, however appealing it may have been in the past, inherently carries elevated risk and can significantly limit long-term return potential by missing out on opportunities elsewhere in the world.
Moving forward, the market is poised for a more balanced, albeit potentially volatile, future. Investors can no longer afford to ignore the vast investment universe outside their national borders. The confluence of more attractive international valuations, a weakening US dollar, divergent monetary policies, and a healthier earnings backdrop in many non-US economies creates a compelling case for a truly global asset allocation strategy. This is not merely about chasing recent performance but about building a resilient portfolio that can weather regional downturns and capture growth from diverse sources.
For the coming months, investors should closely watch several key indicators: the trajectory of the US dollar, central bank interest rate decisions globally (particularly the US Federal Reserve and the European Central Bank (ECB)), and corporate earnings reports from major international companies. Geopolitical developments, especially those impacting commodity prices and supply chains, will also play a crucial role. Ultimately, the lasting impact of this period of international outperformance will likely be a reinforced commitment among savvy investors to a globally diversified approach, ensuring their portfolios are well-positioned to navigate the complex and interconnected financial markets of the 21st century.