- Global Investment and Multi-Asset Strategist
United States, Institutional
Change
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It was only a few months ago that markets were all humming the same tune about “US exceptionalism.” The speed and magnitude of the change we’ve seen since has been stunning, with the MSCI World ex USA Index outperforming the MSCI USA Index by 16 percentage points year to date through April 28.1
After years of US equity market dominance, some investors are understandably skeptical about the ability of international equities to outperform over a longer time frame. But I see five reasons to feel confident they can top the charts for at least the next 12 months.
1. The fundamental outlook is weakening for the US relative to other developed markets — Economic growth and earnings forecasts have been revised down for the US and up for developed markets ex-US (Figure 1), primarily because of US tariffs, which are widely viewed as a tax on consumers and businesses that will slow consumption and investment. Furthermore, the US is expected to bear the brunt of tariff retaliation, while other countries may offset some of the effects by establishing new trading relationships.
Figure 1
2. The overhang of uncertainty deserves a risk premium — While the state of politics remains fluid, we have seen signs of a US tariff strategy that entails starting big and bold and then walking back the more extreme aspects when negotiations toward a reasonable compromise come into view. Markets have been an influence, especially spikes in the yield on the 10-year US Treasury. However, I think political uncertainty will remain a characteristic of US markets and will translate into a larger equity risk premium.
3. Fiscal stimulus is shifting — While US government spending is challenged by rising debt and deficits, Germany’s plan to make a massive €1 trillion investment in military and infrastructure has catapulted Europe into a more favorable fundamental light. I view this as a watershed moment for Germany and the broader European Union as they finally respond to the challenges they face in terms of growth, regulation, and consumption.
4. US dollar strength may be challenged — US dollar strength has been a major headwind for international equity investors in recent years. Today, the US dollar’s primacy among reserve currencies faces a number of threats, including the US fiscal deficit, growth and inflation headwinds, and capital flows. I think we could see continued weakening in the dollar, which may add another layer of return for investors looking outside the US.
5. Tech sector expectations are more mixed — Core to the rotation theme toward international equities is that megacap US tech stocks have a more mixed outlook than a year ago, given concerns about these companies’ capital expenditure plans, rising competition, regulatory issues, and the more cyclical nature of some areas of their businesses. Still, at around 30% of the S&P 500’s market cap, these companies continue to drive index returns.2
I haven’t yet mentioned valuations in my “case for” international equities because that argument has rung hollow in recent years as “attractive” international equity valuations have failed to translate to “attractive” returns. That said, as of 28 April 2025, 12-month forward P/E ratios for European and Japanese equities were 14.1x and 13.4x, respectively, versus the 20.3x multiple of US equities.3 I believe this is a time when there are enough catalysts for some valuation convergence between US and international equities.
Investment implications
Seek diversification in international equities — I think it’s time to consider diversifying portfolios that have a bias to US equities. US equities are facing numerous headwinds relative to international equities, including growth/inflation, fiscal, currency, policy, and megacap tech concerns, which could be catalysts to narrow the valuation gap.
US multinational companies may not be an optimal way to get international exposure — While US multinationals do have international revenue exposure, they still generate more than 60% of their revenue in the US on average, according to MSCI.4 Furthermore, I am concerned that US brands may face headwinds from non-US consumers, governments, or institutional investors in the form of retaliation or simple preferences for non-US companies.
Implementation is key — It’s critical to consider US exposure in investment benchmarks. For example, the MSCI World Index, a common benchmark for international funds, has around 70% exposure to the US.4 Therefore, benchmark-oriented active strategies may be underweight the US but still have a lot of US exposure. It may be better to choose a strategy with a benchmark that’s purely international, like the MSCI EAFE Index or the MSCI World ex USA Index.
1Sources: MSCI, Refinitiv | 2Source: S&P Global | 3Sources: Wellington Management, Refinitiv, IBES. Indices: MSCI USA, MSCI Japan, MSCI Europe. | 4As of 31 March 2025
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