Prepared by Charlie Dear
The phrase “America First” doesn’t seem to apply to the financial markets so far this year. As investors seek opportunities beyond U.S. borders, international equities have delivered notably stronger returns than the S&P 500.
While the S&P 500 is effectively flat year to date, most international portfolios have posted significant, positive results. According to Morningstar, as of May 23rd, 2025*:
Figure 1 (+20.47% – Europe Large Cap Equities, +18.17% – Chinese Equities, +23.00% – Latin American Equities, +10.55% – Emerging Markets Equities)
A variety of factors have contributed to this divergence in performance:
- Valuations: International equities, in many cases, trade at more attractive price-to-earnings, price-to-book-value, and price-to-sales ratios than U.S. stocks.
- Style Tilt: Many international markets have a greater allocation to value-oriented sectors, which tend to outperform when volatility is up.
- Rebalancing Trends: After years of being underweight international holdings, many investors, both retail and institutional, are reallocating to increase global exposure.
- Currency Effects: Strengthening foreign currencies relative to the U.S. dollar have further boosted international returns for dollar-based investors.
- Government Stimulus: In Europe, for example, Germany recently approved a €1 trillion infrastructure and military spending initiative, part of a broader economic alignment within the Eurozone.
- China’s Recovery: After a period of economic slowdown, China has implemented stimulus measures aimed at supporting growth and consumer demand.
- Increased U.S. business costs from tariffs have led foreign states to seek alternative trade partners and reduce dependence on the U.S.
If current global policy and economic trends continue, international equities may offer a compelling complement to U.S. holdings. While past performance is not indicative of future results, these developments reinforce the case for diversification and a strategic global allocation.
*Performance data reflects Morningstar fund category returns for each region as of March 31, 2025. Returns may not reflect individual country-specific benchmarks or index results.
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