Right now, international stocks are a huge bargain compared to U.S. stocks. Apollo Global Management estimates that the price-to-earnings (P/E) ratio, which measures a stock's price relative to the company's earnings, of U.S. stocks is 40% higher than the P/E ratio for the rest of the world. So U.S. stocks are 40% more expensive than international stocks.
The two groups of equities were priced about the same up until about 2015, but the surge in valuations of U.S. tech stocks (think Magnificent Seven stocks) has sent U.S. valuations much higher in recent years. Right now, the average forward P/E ratio for U.S. stocks is about 28, while that ratio lingers nearer to 19 for non-U.S. international stocks.
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Guess what: International stocks have been outperforming U.S. stocks in recent months, in a big way. In 2025, non-U.S. developed market stocks, as measured by the Vanguard FTSE Developed Markets ETF (VEA +0.45%), returned 35.2%. Emerging market stocks, as measured by the Vanguard Emerging Markets Stock Index Fund ETF (VWO +0.74%), returned 25.6%.
Both crushed the U.S. stock market, which rose 17.7%, as measured by the S&P 500 index. That index is a good proxy for the entire U.S. stock market, as it represents about 80% of total U.S. market value.
International stocks' outperformance has continued in 2026
So far in 2026, that trend has continued. VEA, which excludes U.S. equities, is up 8.7% year to date. VWO is up 7%, while the S&P 500 index is essentially flat for the year. Will that divergence between U.S. markets and international markets continue through 2026?
I believe it will, for a couple of important reasons. European stocks look like they have further upside potential this year due to strong global economic growth and rising fiscal and defense spending in Europe, according to Goldman Sachs.
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Prospects for stocks in emerging markets (EM) and developing economies also look good due to rising earnings in many EM countries, particularly China and South Korea. Equities in India and Brazil also look promising in the near term. Goldman Sachs sees EM stocks returning 16% this year.
To be sure, U.S. stocks could rebound, especially since it looks increasingly likely that the Federal Reserve will ease interest rates more than expected this year due to falling inflation. But even if U.S. equities rise to rival the performance of international stocks in 2026, they're still a lot more expensive. So savvy investors will definitely want to consider an investment in international stocks -- both advanced economy and emerging market stocks -- right now.
