The S&P 500 (^GSPC 0.43%) index just finished its third straight year of 15%+ total returns. It's already up another 2% to kick off 2026 (as of Jan. 28, 2026).
But there's a growing problem investors need to face. U.S. stocks have gotten historically expensive.
Currently, the Vanguard S&P 500 ETF (VOO 0.46%) is trading at a price-to-earnings (P/E) multiple of more than 28. The Vanguard Information Technology ETF (VGT 1.99%) is trading at almost 39 times earnings. Outside of three other extreme periods -- the tech bubble, the financial crisis, and the COVID-19 pandemic -- the S&P 500 has never traded at as high of a P/E ratio as it is right now.
We've already seen investors migrating toward more value-oriented stocks. That has included defensive sectors, such as consumer staples and utilities, low-volatility stocks, and small caps. They've also found opportunities overseas.
Trading at steep discounts to the S&P 500, international stocks also have the benefit of a stronger future growth profile and more accommodative monetary policy conditions. This group had a strong 2025, but I believe the Vanguard Total International Stock ETF (VXUS +0.42%) could be set up for a longer stretch of outperformance.
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International stocks balance out the overvalued United States thesis
The advantage of international stocks goes beyond just pure value (although with a P/E ratio of just 17, the Vanguard Total International Stock ETF is about 40% cheaper than the S&P 500). There are differences in sector allocations, economic growth forecasts, and monetary policy backdrops that make overseas investing look comparatively more attractive.
According to a recent International Monetary Fund (IMF) projection, the United States economy is expected to grow 2.4% in 2026. That's better than expectations of 1.3% and 0.7% growth for the Eurozone and Japan economies, respectively. But emerging markets could be where the biggest boost comes from. The IMF is calling for 4.2% growth from this group, including 5% growth in Asia. Given that these economies are central to artificial intelligence (AI) development, they could drive global growth for the next few years.
Investing internationally also represents a pivot away from the tech-heavy composition of the S&P 500. Within the Vanguard Total International Stock ETF, the top sector holdings are financials (23%), industrials (15%), technology (14%), and consumer discretionary (10%). Instead of the top-heavy, concentrated tech exposure in the S&P 500, international investing expands its exposures to overweight cyclicals, but keeps some of that core growth allocation within the portfolio. As the market broadens out and the number of outperformers grows, more diversified funds could have the upper hand.
Monetary policy conditions and the dollar could also act as a tailwind. While many international central banks have paused their rate-cutting cycles, the pulse is still to lower rates further if needed. China is still in the process of easing conditions. The Federal Reserve, on the other hand, may be nearly done cutting rates for the foreseeable future. The futures market now sees only one or two potential cuts in 2026, and that forecast continues to shrink. The regions with lower borrowing rates could have an advantage.
Broad international diversification looks more attractive
The Vanguard Total International Stock ETF tracks the FTSE Global All Cap ex-US Index, which includes companies across both developed and emerging non-U.S. markets. The index is market cap-weighted. Therefore, it's heavily large-cap-tilted with top holdings including Taiwan Semiconductor Manufacturing (TSM 1.44%), Tencent Holdings (TCEHY 2.50%), ASML Holding (ASML 3.54%), Samsung Electronics (SSNL.F +55.02%), and Alibaba (BABA 2.65%). In true Vanguard fashion, its 0.05% expense ratio makes it among the cheapest ETFs to own in this category.
NASDAQ: VXUS
Key Data Points
With a roughly 75%/25% split between developed and emerging markets, the Vanguard Total International Stock ETF gives investors meaningful exposure to two very different risk/reward profiles. Many international stock ETFs tend to skew toward the former group and minimize their allocations to higher-growth-but-higher-risk emerging markets. This ETF doesn't do that, and that's to the shareholder's benefit given current conditions.
But overall value may be the biggest advantage. Forward-looking stock returns tend to be lower when starting valuations are higher. International stocks are at a much lower starting point. That helps balance out potential valuation concerns in a U.S.-only portfolio and could set international stocks up for an extended stretch of outperformance.
