In 2024, America dominated global equities. In 2025 it was the opposite, with Europe being the place to be. So far in 2026, both are doing really well but Asia is in the lead. Obviously these are pretty awesome returns—not just double digits but often north of 20%. Our readers are likely aware we have had a positive affinity towards international developed markets for some time and a more neutral view on U.S. equities. This position was not great in 2024 but since then has been bang on, driving performance. But when it comes to investing, being right often leads to being wrong, while being wrong can lead to being right. The goal is to not ride your winners until they break down; and for those new contrarian positions, hopefully they don’t remain ‘wrong’ for too long.
So, is our positive view on international equities getting long in the tooth? Let’s start by sharing, updating and revisiting key points from our original rationale that got us to be more positive on international equities. Let’s test our conviction.
Valuations and Earnings
At the start of 2025, U.S. equities were trading 22x earnings which was about 6 points higher than their long-term median price-to-earnings ratio. Certainly, on the expensive side. Meanwhile, Europe and Asia had valuations roughly in line with their long-term median level of 13-14x. A clear advantage for international over U.S.
Fast forward to today and the valuation advantage does remain, but it is muted. The U.S. market is down to a more reasonable valuation of 20x, still expensive but by a smaller amount. Meanwhile, Europe is now 15.3x, which is higher than its historical median level. To confuse matters, Asia is down to 12.4x, a lower valuation than both its historical median and its value at the start of 2025.
Valuations are nice to talk about but unless you factor in earnings growth, it only paints part of the picture. In 2025, the earnings growth differential between international and the U.S. narrowed significantly. In other words, after years of U.S. earnings growth being much faster than international markets, the spread narrowed. Combined with cheap international valuations, this led to international outperformance. Today, looking at consensus earnings estimates out the next 12-months vs the trailing 12-months, the pecking order is: Asia #1, then the U.S., followed by Europe. Coincidentally, that matches with relative performance year-to-date.
Add this all up, and valuations and earnings growth still favour Asia, less so Europe. All of this is relative to the U.S. which looks decent. This has us still favouring international from a valuation and earnings growth perspective, but just not as much as at the start of 2025.
Fiscal Spending and Governance
Following COVID, most countries reduced their deficits back to more ‘normal’ levels. However, the U.S. embarked on what we would call tactical fiscal spending. In other words, the U.S. kept the fiscal spending higher than normal to foster economic growth. Whether this was the right decision or not will only become known years down the road. In the meantime, it helped the U.S. economy grow faster than its more frugal peers.
Right or wrong, other countries are now increasing fiscal spending on categories such as defense and infrastructure. This has helped narrow the economic growth gap between those countries relative to the U.S., which is a positive on the international side.
Governance has been improving as well. There is no denying that America is very shareholder friendly. On the international side, we are seeing gradually improving corporate governance, suggesting that those companies are behaving in a more shareholder friendly manner than years past. This is helping translate into improving return on equity as well, a secular trend that is positive for international equities. It’s a bit of a fixer-upper.
Diversification Working Again
Geographic diversification worked very well in the 1980s, 90s,and 2000s. But in the 2010s, it certainly did not, given U.S. consistent outperformance in this period and clustering of performance among international equity markets. More recently, the cross correlation between equity markets has been declining. We see this as a positive signal for allocating more international from a portfolio construction perspective.
One more added benefit is AI exposure. While we are bullish on this AI bubble, there is a risk on how it unfolds in the months or quarters ahead. Based on our AI exposure framework, the U.S. equity market is certainly heavily weighted to this rapidly advancing technology; international markets less so. Japan has a lower exposure and is tilted more towards hardware, Europe even less. This provides added diversification.
Trade and Oil
The blockage of the Strait of Hormuz has been associated with higher and more volatile energy prices. This has been a negative for international markets compared to the U.S., mainly because of their relative energy reliance. While we do not know the future path of this conflict, our base case is it will be resolved from an energy flow perspective. Any move towards resolution has seen international equities rally more than U.S. A more stable solution could easily usher in a period of stronger international equity performance.
Additionally, global trade has been on the rise. As Europe and Asia are more sensitive to global trade, from their perspective the more the better. Historically, periods of rising global trade – above the 4% line in the chart below – have coincided with international outperforming U.S. equities (EAFE vs S&P 500 Index). We have now been over the 4% global trade growth threshold for a couple years.
Final Thoughts
It is not as cut and dry as it was in early 2025, but enough dynamics are in place to continue with a positive view on international. The valuation discount has narrowed, but improving governance, rising return-on-equity, rising global trade and a potential cooling of energy markets remain supportive. Plus, with most portfolios still heavily U.S. tilted, there are strong diversification benefits from international which helps reduce portfolio AI exposure risks. Maybe not to an exceptional degree, but certainly worthy of a healthy exposure.
Please don’t take this as a negative view on the U.S. We remain neutral or market weight to our baseline for U.S. equities, encouraged by strong earnings and valuations that are not as elevated. But we do remain more positive on markets across either ocean.
– Craig Basinger at Purpose Investments.
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