Over the past year, international equities experienced strong performance, contributing to portfolio returns.
We approach portfolio management with diversification as foundational to our process. The one-sided leadership of U.S. equities over the past 15 years has been a challenging cycle, but the recent shift in equity leadership has highlighted the importance of allocating abroad. Long-run trends such as this often push diversification out of favor, which we view as misguided. History has shown that these cycles rotate over time and often can last longer than many expect. Investing in international and emerging market stocks provides exposure to diverse economies, businesses, and currencies, all while serving to enhance your potential returns and possibly lowering your overall portfolio risk.
The past year highlighted the role that non‑U.S. equities can play in a diversified portfolio, as international and emerging market equities performed well in 2025 relative to U.S. equities The MSCI EAFE Index and MSCI Emerging Markets Index returned 31.2% and 33.6%, respectively, compared with a 17.9% return for the S&P 500 Index. This roughly 1,334 and 1,560 basis points of outperformance in 2025 was in sharp contrast to many recent years, where U.S. stocks captured much of the market returns and overall investor interest. U.S. returns remained strong on the back of two consecutive years of 25%+ returns for the S&P 500 Index during 2024 and 2023. Over the trailing 15-year period, the S&P 500 Index has extensively outperformed with an annualized return of 14.1%, compared with 6.6% for the MSCI EAFE Index, and 3.8% for the MSCI EM Index. However, portfolios that remained globally diversified in 2025 were rewarded with stronger returns than a U.S.-only approach. Gains were even more impressive in certain specific markets, with the MSCI Korea Index gaining 99.9%, MSCI Spain Index gaining 82.4%, MSCI Germany Index gaining 36.3%, and MSCI Vietnam gaining 66.7%. Looking ahead, valuations, opportunities, and more favorable risk characteristics make a compelling case for international and emerging market equities to continue their run and, importantly, cement the rationale for inclusion in a well-diversified portfolio.
| Name | 2025 | 2024 | 2023 | 2022 | 2021 | Total Ret Annlzd 15 Yr |
|---|---|---|---|---|---|---|
| MSCI EAFE NR USD | 31.22 | 3.82 | 18.24 | -14.45 | 11.26 | 6.64 |
| MSCI EM NR USD | 33.57 | 7.50 | 9.83 | -20.09 | -2.54 | 3.82 |
| S&P 500 TR USD | 17.88 | 25.02 | 26.29 | -18.11 | 28.71 | 14.06 |
| US Dollar | -9.37 | 7.06 | -2.11 | 7.87 | 6.71 | 1.47 |
Relative valuation outside the U.S. continues to be a powerful investment thesis. Valuations in U.S. equity markets are elevated relative to historical ranges, particularly within segments of the U.S. growth market. Contrasting this, multiples across Japan, Europe, and emerging markets are only slightly ahead of their 20-year average. The S&P 500 Index currently trades at roughly 22x its forward P/E compared with 14.9x in the Eurozone. Compared with the S&P 500 Index, the MSCI ACWI ex-U.S. Index trades at a roughly 32% discount to U.S. stocks, much deeper than the 20-year average discount of 19%.
Where AI and the Magnificent-7 fit in
Much of the higher valuation in U.S. stocks has been driven by the powerful returns of the Magnificent-7 stocks, whose AI and technology focus have soared over the past few years. This has also led to increased concentration risk among a few mega-cap U.S. stocks, with the top 10 companies in the S&P 500 Index now comprising near 40% of the total weight of the index, a record level. This compares to the MSCI EAFE Index concentration of roughly 13% within its top 10 companies, highlighting its broader and more diverse exposure. The potential for earnings growth may also serve as a catalyst to power international stocks higher. With a forecast of 10% earnings per share growth for the MSCI EAFE Index, compared with a much slower average of 4% earnings growth of the past five years, suggesting an improvement in earnings growth expectations for international companies.
Tariffs and diversification
One of the larger developments of 2025 was the heightened headline risk from tariff announcements and an ever-shifting global economic outlook from their potential implementation. The tariff tantrum in early April of 2025, led to a rollercoaster experience for investors as U.S. stocks plunged nearly 20% off their highs before recovering once the tariffs were delayed and reduced. Through the end of April, the S&P 500 Index was down 4.9% compared with a gain of 11.8% for the MSCI EAFE Index. International stocks found themselves more insulated by these events due to a weaker dollar, which declined by 9.37% in 2025. The market experienced several of these tariff shocks throughout the year, and while equity market recoveries were common, the divergence of U.S. and international stocks helped to power international leadership. As global economic conditions have evolved, maintaining exposure to international markets and non‑U.S. companies can play an important role within a diversified investment approach.
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