In our view, the possibility of a turning point is supported by a robust combination of factors:

1        Broadening leadership across international geographies and capitalizations

2        Renewed earnings momentum in international markets

3        Compelling relative valuations favoring international markets

4        Reduced cross-market correlations

5        Currency dynamics that increasingly support international exposure

For long-term investors, the case for rebalancing toward international and global public equities might be timely and appears strategically sound. Global public markets appear to us to be poised to play an enhanced role in forward-looking portfolio construction, offering investors the opportunity to access a broader and increasingly independent set of return drivers.

1 Turning point in performance leadership      

For the first time in over a decade, an international equity benchmark, the MSCI ACWI ex USA Index, has outpaced the S&P 500 Index on both a year-to-date and trailing 12-month basis through June 30, 2025.¹ This performance reversal signals a possible inflection point in global equity leadership. International equities have delivered superior recent returns, with the MSCI ACWI ex USA Index outperforming across key periods, including year to date and over the past year. In addition, performance gaps over three- and five-year horizons have narrowed, and emerging markets have begun to regain momentum after a protracted period of underperformance.

Notably, the MSCI ACWI ex USA Small Cap Index outperformed both the S&P 500 Index and the traditional MSCI ACWI ex USA Index over the 12-month period ended June 30.¹ This underscores that recent global equity leadership has no longer been narrowly concentrated but rather dispersed across both regions and market capitalizations. 

Further supporting the case for a structural shift in global leadership, the MSCI World ex USA Index recently climbed above its prior cyclical highs to levels last seen before the 2008 global financial crisis.¹ After nearly 15 years of range-bound behavior, this breakout reflects improving fundamentals across international markets, including rising earnings power, greater multiregional participation in innovation and capital formation, as well as favorable currency and policy dynamics.

Together, these market developments suggest a changing landscape—one in which long-underweighted international exposures may deserve renewed consideration in global portfolios.

Several of the strongest-performing countries through the first half of 2025 include both smaller developed markets such as Ireland, Austria, and Spain, as well as emerging markets, including Greece, Poland, and Colombia.¹ This breadth of leadership underscores the value of a global investment lens—one that evaluates opportunities across geographies, asset classes, and stages of economic development.

Even as international market leadership has recently appeared to be broadening, U.S. stock market leadership has been narrowing. The Magnificent Seven stocks that dominated index-level returns in recent years appear to be decoupling, as only a subset of these companies outperformed in the first half of 2025, with others lagging meaningfully. The result is a possibly more fragile source of market leadership within the United States.

2 Renewed international earnings momentum

The earnings growth advantage that U.S. companies have long enjoyed has recently narrowed. Forward-looking earnings expectations for international market indexes, including the MSCI Emerging Markets Index and the MSCI EAFE Index, recently became comparable to—and in some cases stronger than—those for the U.S. market. ¹

The next-12-month earnings per share growth trajectories for the MSCI ACWI ex USA Index, the MSCI EAFE Index, and the MSCI Emerging Markets Index have rebounded from postpandemic lows and recently began tracking closely with the MSCI USA Index.¹ In our view, this convergence reflects improved macro stability, policy support including monetary easing, and rising operating efficiency, all leading to an upturn in earnings revisions across many international markets.

The return of earnings momentum outside the United States reinforces the case that recent outperformance has been driven by improving fundamentals, fueling a valuation re-rating that has started from depressed levels, supporting further potential appreciation. For investors seeking exposure to earnings growth at a discount, the international landscape may offer an increasingly compelling alternative to U.S. markets.

A number of country and regional initiatives are supporting improving growth and returns on capital, including Japan’s third-arrow initiatives, South Korea’s value-up programs, and renewed defense and infrastructure investment in Europe led by Germany, where the debt brake has been removed. These initiatives are contributing to possible recovery in the relative profitability of international companies versus their U.S. competitors. Operating margins in Europe and Japan appear to be stabilizing relative to U.S. averages. In addition, while the trend in other markets such as South Korea is more cyclical, there appears to be an upward bias.

3 Attractive international valuation upside potential

Notwithstanding the recent performance rebound, valuation disparities remain a compelling argument in favor of international markets, in our view. The MSCI ACWI ex USA Index recently traded at a forward price-to-earnings multiple more than 30% below that of the S&P 500 Index, placing the valuation spread in the most attractive decile of the past two decades.

Moreover, the U.S. market’s valuation premium recently reached historically extreme levels. While some gap is justified by differences in sector composition and business mix, we believe that the recent spread reflects a level of investor concentration and optimism regarding U.S. exceptionalism that may prove difficult to sustain.

The depth of this relative valuation gap suggests that even modest shifts in capital flows, sentiment, corporate performance, or macroeconomic assumptions could catalyze meaningful upside for international equities. Recent international valuations also suggest a degree of downside protection that is increasingly scarce in many parts of the U.S. equity market.

4 Enhanced portfolio diversification

A significant decline in cross-market correlation further strengthens the case for global diversification, in our view. The 12-month rolling correlation between the S&P 500 Index and the MSCI ACWI ex USA Index recently fell to 0.64, well below the 25-year average of 0.83.

In fact, correlations between U.S. and international equity returns were recently well below the average levels of recent decades. Lower correlation expands the potential diversification benefits of international allocations, offering investors more effective risk mitigation at the total portfolio level. Therefore, added global exposure may contribute meaningfully to overall portfolio risk management and diversification.

5 Currency tailwinds favor international markets

The U.S. dollar has recently retreated from historically elevated levels, a development that has typically coincided with periods of relative outperformance by international equities. The dollar recently declined from levels more than one standard deviation above its 20-year average, suggesting the potential for further mean reversion.

As one would expect, there’s a notable, persistent relationship between dollar weakness and outperformance by international markets. The U.S. dollar’s monthly changes have maintained a consistent inverse relationship with the relative performance of international equities versus the S&P 500, with a correlation of -0.52 and an R-squared of 0.27.¹

Over the longer term, structural forces might also be at play. The U.S. dollar’s share of global foreign exchange reserves has declined from 72% to 58% over the past 25 years, reflecting a gradual but persistent diversification away from dollar dominance by foreign central banks.

This ongoing shift in currency exchange reserves may accelerate, given growing imbalances in the U.S. fiscal position. Total U.S. public debt has reached unprecedented levels, fueled by aggressive fiscal stimulus. The recent passage of President Trump’s One Big Beautiful Bill Act underscores the continuation of expansionary fiscal policy, potentially further straining the U.S. national balance sheet and possibly reducing long-term confidence in the dollar.

Finally, overall global sentiment toward the United States has recently deteriorated, according to international surveys that show a broad decline in U.S. favorability across both developed- and emerging-market countries. While sentiment data can be volatile, it may signal longer-term geopolitical headwinds and a diminished appetite for unhedged dollar exposure, in our view.

According to data from the U.S. Federal Reserve, demand for U.S. equities has been a key driver of demand for the U.S. dollar, perhaps even exceeding foreign reserve flows. U.S. equities as a percentage of global market capitalizations may have peaked in February 2025, suggesting that portfolio flows could also become a headwind to the dollar. Note that investors who benchmark based on market capitalizations will have a historically elevated U.S. market exposure, reinforcing the merit of reexamining international and global equity allocations.

Conclusion: a timely opportunity to reexamine global equity allocations

In sum, these structural and cyclical factors suggest to us that currency dynamics could increasingly favor outperformance by international and global markets. A confluence of notable developments—recovering international equity performance, historically attractive valuations, renewed earnings momentum, declining correlations, a supportive macro backdrop, and currency tailwinds—constitute a sound basis for potentially increasing international and global equity exposure, in our view.

In a world shaped by accelerating technological innovation, fiscal headwinds, and geopolitical realignment, we believe that dynamic growth investors should look beyond U.S. borders to access the full spectrum of opportunity. Global public markets offer liquidity, valuation transparency, and immediate access to world-leading innovation.

For investors seeking to efficiently compound capital and manage risk, the rationale for rebalancing toward international and global public equities appears strong. As stewards of client capital, we remain committed to a disciplined, fact-based process for identifying companies benefiting from wide and expanding moats, positioned for durable and accelerating growth, and fueling strong outcomes in an increasingly opportunity-rich global landscape.

1 FactSet, as of 6/30/25.