5 Reasons to Consider Global ex-US Equities
Global ex-US equities have lagged U.S. stocks over the past decade, but we believe the tide is turning.
Global ex-US equities have lagged U.S. stocks over the past decade, but we believe the tide is turning.
After many years of U.S. equity outperformance, it’s understandable that global diversification may have seemed less appealing to some investors in 2025. After all, global inflation remains in flux and continues to keep central banks on their toes, with the unresolved Russia-Ukraine war and higher US trade tariffs weighing on the outlook for global companies.
However, focusing too narrowly on the U.S. could mean missing compelling opportunities abroad. In fact, 2025 may offer a favorable backdrop for high-quality companies outside the U.S., particularly those with strong fundamentals and durable growth prospects, to deliver outperformance.
In this article, we outline five key reasons why some companies outside the U.S. may be better positioned than their U.S. counterparts in the current environment.
1) Global ex-US Valuations Remain Meaningfully Lower Than in the U.S.
For over a decade, international markets have traded at a discount to the U.S., and that gap widened further after the COVID-19 pandemic. By the end of 2024, the S&P 500’s valuation multiple had risen 52%, while the MSCI ACWI ex U.S. declined slightly.
Much of the U.S. outperformance was driven by lower interest rates and the dominance of tech stocks. But recent policy and geopolitical uncertainty have unsettled markets, making the relative value of high-quality companies outside the U.S. increasingly compelling for long-term investors.
Source: Bloomberg
2) U.S. Dollar Strength May Have Peaked
The U.S. dollar has been seen as the global reserve currency and is a leading currency for international borrowing. U.S. assets have broadly outperformed the rest of the world for the past decade, prompting growing demand for the dollar. However, the dollar has yet to regain its footing in 2025, initially on tariff-related fears and more recently on the announcement of said tariffs. In fact, the dollar recently fell to its lowest level in three years against a basket of foreign currencies (ICE U.S. Dollar Index, below). The euro, Japanese yen, and Swiss franc were among the currencies that gained the most against the dollar this year.
Source: Bloomberg
A weaker dollar makes goods and services from non-U.S. companies more affordable in global markets, enhancing their export potential. It can also boost the earnings of companies with foreign operations and improve the valuation of international stocks for U.S.-based investors. These factors may continue to put downward pressure on the dollar, ultimately creating a more favorable environment for international companies.
3) Earnings Growth
When interest rates were 0% in the U.S., they were negative in Europe and Japan, two of the main countries that are represented in the MSCI ACWI ex-US. Negative interest rates were a headwind to financials. Still, these rates lowered borrowing costs, which can encourage consumer spending and corporate investment, supporting earnings in rate-sensitive sectors and being advantageous for active investors.
Typically, when you remove an important revenue and earnings driver for the largest sector in an index, you’re going to create an earnings growth headwind.
However, equity prices should eventually track earnings. Since the normalization of interest rates, we see the earnings growth in two of the main international markets, Europe and Japan, has kept pace with that of the U.S. Innovation (in pharma, for example), corporate efficiencies, and competitiveness have been behind improving earnings growth in Europe. For Japan, corporate governance reforms and yen depreciation help boost earnings.
4) Improving Sentiment
Positioning portfolios ahead of broadly improving sentiment toward Global ex-US equities is increasingly important, as we’ve observed a growing bias toward international opportunities, particularly in regions like Europe, where growth has lagged despite persistent negative sentiment. In anticipation of tariff announcements, we’ve been identifying bottom-up opportunities in fundamentally undervalued companies abroad, with a focus on sectors such as financials, telecommunications, and utilities that are broadly insulated from tariff-related risks.
5) Less Concentrated Markets and the Benefits of Global Diversification
Another major variable of the relative equation between the U.S. and international equities was index construction. The bulk of U.S. equity outperformance vs. international in the last 10-plus years has been driven by a small set of technology companies, most notably the FAANG companies, and the sector has become an increasingly prominent component of U.S. equity indices. While technology companies heavily influence the U.S., the MSCI ACWI ex-US’s biggest sector is financials, which comprises about a quarter of the index. International markets, by contrast, offer a much more diversified basket of companies — the technology sector only accounts for 12% versus nearly a third of U.S. markets. This greatly reduces concentration risk and leaves more room for investors to uncover growth opportunities that may be unavailable in the United States.
Sector Composition of U.S. vs. Global ex-US Markets
| Sector | S&P 500 | MSCI ACWI ex-US |
|---|---|---|
| Information Technology | 29.6% | 12.2% |
| Financials | 14.7% | 24.8% |
| Health Care | 11.2% | 8.7% |
| Consumer Discretionary | 10.3% | 11.1% |
| Communications Services | 9.2% | 6.2% |
| Industrials | 8.5% | 14.0% |
| Consumer Staples | 6.1% | 6.9% |
| Energy | 3.7% | 5.0% |
| Utilities | 2.5% | 3.1% |
| Real Estate | 2.3% | 1.7% |
| Materials | 1.9% | 6.3% |
Source: S&P Dow Jones Indices, MSCI, as of 31 March 2025.
The topic of diversification has obviously moved to the forefront in 2025 as tariffs and trade wars have weighed on growth expectations and highlighted the downside potential in highly concentrated markets like the U.S. Global ex-US markets allow investors to find high-quality companies with diverse revenue streams.
The Opportunity
Investors have been underweighting global ex-US equities for the past several years, and, for the most part, it has served them well. However, the dynamic between U.S. and international stocks is rapidly shifting and evolving. Investors should seek to diversify by sector, style, and geography, and target quality companies with catalysts for success, selling at attractive valuations. International equities are a much more differentiated set of companies and industries than the U.S., which can benefit investors in the form of a diversified portfolio.
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