For the past decade, investing money in international stocks meant underperformance and disappointing returns. U.S. equities have been clear winners for years, and the argument for diversifying overseas didn't make much sense.
In 2025, things started to look different. That's when international stocks finally beat the S&P 500 by a wider margin for the first time in years. The iShares Core MSCI Emerging Markets ETF (IEMG +0.52%), which invests in developing market stocks, posted a calendar-year return of roughly 32% compared to the 18% return of the Vanguard S&P 500 ETF.
Given the improved earnings outlook and comparatively attractive valuations, continuing to invest in international stocks might be a no-brainer, considering how momentum has picked up.
Image source: Getty Images.
Why international stocks and why now?
Emerging markets are often expected to grow faster than the U.S. and other developed market economies. But the forecasts for 2026 and 2027 show a wide gap.
According to the International Monetary Fund (IMF), emerging markets will grow by an estimated 4.2% this year. That compares favorably to the 2.4% expected growth rate of the United States, and the 1.8% growth rate of developed markets more broadly. In 2027, similar growth rates are expected, but the U.S. growth rate is expected to slip to 2%.
It takes only a quick look at returns over the past 10 to 15 years to understand that economic growth rates don't necessarily translate into returns. But the conditions that could support the story, such as a weakening dollar and countries looking to find U.S. alternatives for trade and business, could finally unlock some of the value in this group.
NYSEMKT: IEMG
Key Data Points
Speaking of value, emerging markets are also trading at an historically wide discount to the S&P 500. The iShares Core MSCI Emerging Markets ETF currently trades at a forward price-to-earnings (P/E) ratio of 12, much below the 20 multiple for the S&P 500.
Emerging markets traditionally trade at lower P/E ratios than U.S. stocks, so that part isn't surprising. Historically, the discount is on average around 20%-25%. The current 40% discount suggests a real deep-value opportunity.
The risk, of course, is that emerging markets aren't able to follow through on their earnings or economic growth estimates. If those fail to deliver, investors won't be compelled to move their portfolios into these regions, regardless of how cheap they are.
But the odds appear to be finally tipping in emerging markets' favor. With U.S. government debt continuing to rise, the case for a weaker dollar is solid. The global macroeconomic backdrop supports the accelerating growth case. And we know how cheap emerging-market stocks are.
It may only be a matter of time before emerging markets finally enjoy an extended run of outperformance.
