In the previous years, American stocks have taken the lead in global markets. The supremacy of U.S. markets over the last decade has ignited a dialogue among investors on the relevance of international equities in diverse investment portfolios. After all, a decade is a substantial period to establish a trending pattern. For younger investors especially, belonging to Generation Z or Millennials, the dominating performance of U.S. stocks has been their investment reality. However, financial markets have an inherent knack to recalibrate our beliefs and 2025 seems to be that pivotal point. As the U.S. stock market deals with unpredictable shifts due to tariff uncertainties and their economic consequences, global stocks have moved into the limelight, boasting impressive returns in double digits. Consequently, investors are intrigued to decipher whether this is a fleeting rally or a robust trend in the making.
Let’s delve into four plausible reasons that portray a promising future for international markets. One of the principal determinants is the valuation of international equities. For context, even in the middle of 2025, American stocks persist in trading at historically elevated price-to-earnings (P/E) ratios. In the same breath, their international contemporaries from both developed and emerging markets are trading at substantial markdowns, as compared to their historical norms and U.S. equivalents. A case in point is the MSCI EAFE Index (representative of developed international markets) with a P/E ratio in the mid-teens, at a steep contrast with the S&P 500’s premium in the 20–22x earning range.
Individuals critical of overseas markets insist that the inflated American valuations are justified due to the structural leverage U.S. companies enjoy. However, it’s crucial to remember that low valuations don’t automatically translate into immediate, elevated returns. That said, long-term investment horizons do hint at a correlation between the initial valuation and the eventual possibility of impressive returns. To sum up, while the higher valuation of U.S. stocks might be warranted currently, foreign equities potentially have more room for profit in a bullish market situation.
The cardinal rule of Diversification continues to hold relevance. The gains of diversification have seemingly taken a backseat in recent years. With a handful of gargantuan tech companies, the ‘Superlative Seven’, galloping ahead in returns and outperforming most others during this period. This has catapulted the S&P 500 to unprecedented highs, but not without its share of risks. While it’s uncertain whether this select group of high-performers will maintain their dominant run, past trends suggest that strategic readiness for potential market shifts is key.
Global markets help provide a protective layer against such risks by offering exposure to diversified economic cycles, currency landscapes, demographic trends, and sectors that are not predominantly represented in the U.S. Consider Europe; its indices are primarily driven by industrials and financials. Similarly, emerging markets provide opportunities to capitalize on the rapidly expanding middle class in countries like India, Mexico, and Indonesia. In a scenario where U.S. market growth slows down or faces unprecedented policy challenges, international markets may serve as a balancing force, offering opportunities, as has been the case this year. The primary intent of global diversification is not to forecast the succeeding market leader but to evade the next major market downturn.
An economic principle, the Capricious Dollar and Currency Exchange, also plays a role here. Post the 2008 Financial Crisis, the U.S. dollar has continuously appreciated while international investors trying to convert earnings from various global currencies into an ever-strengthening dollar faced the brunt. Unfavorable exchange rates adversely impact returns directly. This recent trend of the dollar depreciating as compared to other major currencies, however, might act as a tailwind for investors based in the U.S. who hold foreign equities, as these earnings will be more valuable when converted back into dollars.
It’s close to impossible to precisely predict the fluctuating trends of exchange rates. However, it is certain that the dollar will have phases of weakening, thus providing a favorable environment for overseas equities to flourish.
The last point to consider is the expanding curve of worldwide growth. While the concentration of innovation remains undeniably in the U.S., exciting growth trends are emerging globally across multiple sectors such as technology, supply chain, and consumer growth. For instance, Asia’s semiconductor production presents exposure to the AI sector. Southeast Asia is witnessing an upsurge in Fintech and mobile payments adoption. The shift of manufacturing hubs away from China to other developing economies like Vietnam and India presents affordable alternatives. The mining of essential metals in China and South America offers further investment prospects.
These crucial trends showcase that international markets, earlier merely regarded as ‘value buys’, are now offering investors the opportunity to diversify their portfolios beyond the limited U.S. exposure and tap into global growth avenues.
Final thoughts on the role of international investments: International stocks are enjoying their well-deserved limelight, but there’s reason to believe that this phase could evolve into a sustained trend spanning many years. With appealing valuations, rapidly globalizing growth, potential currency benefits, and the intrinsic benefits of diversification, the argument for international exposure is both time-proven and currently relevant.
For a seasoned investor with a diversified portfolio, this juncture serves as a welcome breather, encouraging reflection on the importance of international exposure from a strong, confident position instead of a weak one.
Moreover, for those who have yet to venture into international investments, this could potentially be an opportune moment to ponder over how the addition of such investments in their portfolio might help them build a more robust and enduring financial portfolio.