International stocks finally had a moment of outperformance relative to the S&P 500 (^GSPC 1.52%) in 2025. But those moments have been rare over the past several years. With few exceptions, U.S. stocks have steadily and consistently outperformed international stocks since the financial crisis.
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But now it's looking like the pendulum may be ready to swing in the other direction.
With the S&P 500 at historically high valuations and still very top-heavy with the "Magnificent Seven" stocks, the current rotation away from megacap stocks may provide the opening for a lengthier run for foreign stocks.
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Current market performance: International vs. U.S. stocks
In 2025, the iShares MSCI EAFE ETF (EFA 1.57%) beat the State Street SPDR S&P 500 ETF (SPY 1.51%) by a 31.6% to 17.7% margin. The iShares MSCI Emerging Markets ETF (EEM 3.20%) did even better by returning 34%.
The biggest driver hasn't necessarily been the move away from U.S. tech stocks, although that has contributed. It has been the rotation from growth into value. The U.S. labor market continues to slow, and retail sales activity has begun to slip. Investors are hesitant to keep bidding up expensive growth stocks and are interested in something more reasonably valued to provide a bit of protection.
That move to value, along with a weakening dollar, has helped give international stocks a boost as well.
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Key Data Points
ETF investors have taken notice too. On a relative basis, international and emerging markets equity ETFs have taken in new money over the past year at nearly twice the rate of U.S. equity ETFs.
The case for international stocks to move higher
Foreign equities have a number of tailwinds working in their favor.
Lower valuations: The S&P 500 currently trades at a forward price-to-earnings (P/E) ratio of around 29. International developed and emerging markets stocks trade at 19 and 18 times earnings, respectively. Foreign stocks often trade at lower multiples than U.S. stocks, but the current valuation gap presents an attractive opportunity for those seeking better value.
Economic tailwinds: Fiscal stimulus efforts in places like Germany, productivity gains, and a lower dollar could accelerate growth rates overseas.
Earnings growth: 2025 saw near-stagnant earnings growth rates in most of Europe and other developed regions. In 2026, estimates call for high single-digit to low double-digit earnings growth rates across developed and emerging markets. This supports the fundamental case for higher stock prices.
Diversification: Many international markets are much less reliant on tech to drive growth. Their exposure to different economic cycles and sector compositions means a potentially different pattern of returns.
Current risks facing international stocks
Even though the environment for international stocks has improved, a number of risk factors at play could damage momentum.
Geopolitical risk is still front and center. Global trade tensions have intensified, and any further increase in tariff rates is likely to hinder growth potential. A sustainable rebound in the dollar index would act as a headwind for international stocks relative to the S&P 500. Many international economies are cyclically sensitive. Therefore, any slowdown in manufacturing or trade might be felt especially strongly overseas.
Is the time right for international stocks to keep moving higher?
Given that U.S. stocks outperformed pretty much nonstop from the end of the financial crisis through the mid-2020s, it's safe to say that international stocks are long overdue for an extended period of outperformance.
Overall, international stocks are 1) more cyclically sensitive on average than U.S. stocks and 2) demonstrate much better value when considering metrics such as the price-to-earnings ratio. Neither of those has been much help since investors consistently preferred U.S. tech and growth.
Sentiment is beginning to change. Value is back in favor, and the comparatively better growth acceleration expectations of international markets could be the thing that finally unlocks it.
If foreign companies can deliver on those expectations, it could be another good year for international investing.
