Beyond Borders: Strategies for International Investing in 2025

As we look ahead to 2025, the question of whether investors should allocate capital to international markets has become increasingly relevant. For over a decade, the U.S. has led the charge in market performance, making the prospects of diversifying outside its borders an intriguing topic for both seasoned investors and those new to the financial landscape.

In recent years, the correlation between U.S. markets and non-U.S. markets has diminished significantly. This shift implies that when U.S. markets experience downturns, international markets could provide a buffer, offering greater stability and potentially mitigating losses in turbulent times. While international markets may not have outperformed their U.S. counterparts recently, they present an opportunity for diversification—a strategy that becomes invaluable in unpredictable market climates.

Disparity Brings Opportunity

Investment valuations play a crucial role in this narrative. Currently, the S&P 500 exhibits elevated valuations, trading at approximately 22 times forward earnings, see Figure 1 below. In contrast, international markets are providing comparably better starting points, with lower valuations. This disparity is critical; it means that investors looking to broaden their portfolios by including international stocks can do so at a time when they are relatively undervalued compared to U.S. stocks. Seizing this moment may lead to enhanced returns while also utilizing the benefits of diversification.

U.S. Valuation Premium vs. Non-U.S. Equities is Historically Wide

Moreover, it’s essential to recognize that over 40% of the earnings from the S&P 500 are derived from international markets. This statistic underscores a vital point: investors may be paying a premium for these international earnings without the direct advantages that come from investing in those overseas markets. By shifting their focus to international investments, they can capture these earnings at a lower entry point, opening the door to potentially higher returns.

Quality Leads to Potential

Another factor to consider is the quality of companies available in international markets. The perception that quality diminishes outside of U.S. borders is increasingly outdated. A multitude of high-quality businesses exist globally, with robust fundamentals, innovative products, and strong management teams. By investing internationally, investors can tap into a vast array of companies—many of which are leaders within their industries—thus enhancing their portfolio’s quality and growth potential.

Elevated Growth Expectations for U.S. Companies

Analysts project a remarkable 15% growth for U.S. companies by 2025. This figure stands as a testament to the high bar set for the U.S. market, reflecting the strength and resilience of many American industries. However, such an ambitious target raises questions about sustainability and whether companies can meet these expectations without falter.

In contrast, the earnings growth outlook for international markets is comparatively more subdued. This lower bar might suggest a more favorable environment for international companies to exceed expectations, allowing them to capitalize on less aggressive forecasts and potentially delivering better relative performance against those expectations.

Concentration Risks in U.S. Markets

One noteworthy feature of the U.S. market is its high level of concentration, where a handful of companies significantly influence overall returns. The top ten companies alone account for over 30% of the market capitalization. This concentration creates both opportunities and risks. A single slip-up from any of these key players could precipitate substantial declines in market performance, leading to heightened volatility.

Bad Breadth: The U.S. Stock Market Is Historically Concentrated

Thus, while the expectation for high growth might tempt investors, the inherent risks also necessitate a cautious approach. The ability to achieve substantial gains hinges not only on the overall economic conditions but also on the performance and stability of these market giants.

The Case for International Diversification

Looking beyond the U.S., international markets present a more diversified opportunity landscape. With a broader array of companies across various sectors and geographies, international markets may be less susceptible to the whims of a few dominant players. This diversification can be a critical driver of performance, especially in an environment where U.S. companies face elevated expectations.

As global companies also contend with fundamental growth drivers, their lower earnings projections may position them strategically to surprise investors with better-than-expected performance. This could further enhance international markets’ appeal as investors seek ways to balance their portfolios against concentrated U.S. holdings.

Conclusion – Clients Should Reconsider Their Non-U.S. Exposure

As we move closer to 2025, investors must remain vigilant about the dynamics shaping both U.S. and international markets. While the U.S. shows promise with high growth expectations, the risks associated with concentration cannot be overlooked. Conversely, international markets could offer a compelling alternative with more diversified growth drivers, appealing for those seeking to mitigate risks while still pursuing growth.

In conclusion, maintaining a diversified investment strategy might not only provide stability in uncertain markets but could also uncover opportunities that arise from the distinct trajectories of U.S. and international performance. The coming years will undoubtedly challenge assumptions and test the resilience of both markets, making it essential for investors to stay informed and agile in their decision-making processes.