Many investors have found religion when it comes to international diversification.
For the first time in eight years, international stocks outpaced their U.S. counterparts in 2025—by an astounding 14 percentage points—returning 32% versus 18% for U.S. equities. That reversal has prompted many investors to increase exposure to international markets.
We’ve long advocated for a broad, market‑weighted approach to global equities, emphasizing strategic asset class diversification over market timing or stock picking. The recent performance of non‑U.S. stocks reinforces that philosophy—but investors should be careful to avoid chasing performance.
Recency bias is a poor foundation for sound investing. While international stocks posted a banner year in 2025, there is no guarantee of a repeat performance.
Some of the forces behind last year’s outperformance remain intact—notably, increased EU spending, tariffs, threats to Fed independence, and uncertainty about U.S. deficits. Other dynamics are new. The war in Iran, for example, has led some investors back to U.S. assets as a perceived safe haven. Even so, international stocks have continued to outperform on a year-to-date basis in 2026.
Despite heightened geopolitical risk, we see three reasons why non-U.S. equities may still have room to run.
International stocks remain more attractive than U.S. stocks based on valuations. As of early February, investors in the S&P 500 were paying about $22 for every dollar of earnings, based on two-year forward estimates that assume robust growth will continue. By contrast, investors were paying only $15 per dollar of earnings in developed markets ex-U.S., and just $13 in emerging markets.
Skeptics argue that higher U.S. valuations are justified because U.S. companies are expected to deliver faster earnings growth. Over time, stock prices do tend to follow earnings, which is why investors should be cautious about abandoning U.S. equities altogether. Still, valuations matter—particularly when they diverge as sharply as they do today.
An unhedged approach to investing is international equities provides a natural hedge against declines in the value of the US dollar, as these companies generate earnings in foreign currencies. If the dollar continues to weaken, U.S. investors in international stocks may benefit mechanically through what’s known as the currency effect.
Several forces could weigh on the dollar in the year ahead, including a volatile trade war, significant and persistent U.S. deficits, and political pressure for lower U.S. interest rates. These dynamics are central to the current investment thesis underlying international stocks.
That said, predictions of the dollar’s demise are often exaggerated. The U.S. dollar remains the world’s most heavily favored reserve currency, one that has no credible near‑term rival. Notably, when the Iran war began, the dollar actually strengthened—underscoring its continued role as a global safe‑haven asset during times of turmoil.
The global economy appears to be entering an era in which globalization has stalled—or is gradually reversing. For example, global trade as a share of global GDP rose steadily through the 1990s and early 2000s, flattened after the 2008 Global Financial Crisis, and has declined since 2022. In a world where globalization stalls or reverses, there will be opportunities in global markets that are not captured through exposure to U.S. stocks alone. Again, the takeaway here is to remain diversified—globally and not just within US stocks.
Clients often ask me how an equity portfolio should be allocated between U.S. and international stocks. Since U.S. companies comprise about 65% of the world’s stock market capitalization, a good starting point is to take a market-weighted approach: allocate two-thirds to U.S. stocks and a one-third to international equities (which includes both developed and emerging market stocks). The largest non-U.S. equity markets include Japan (5%); the U.K. and China (each at about 3%); followed by other advanced economies.
For U.S. citizens who live in the U.S. and expect to spend their savings in the U.S., a slight tilt toward the U.S. may be appropriate. The reality, however, is that most U.S. investors have little or no allocation to international stocks and can often improve their portfolios by increasing their allocations to international stocks. An investor who is 100% allocated to the S&P 500 is missing an opportunity to benefit from broader global diversification.
For investors concentrated in U.S. equities, increasing international exposure is a sound instinct. The most effective approach is a measured one, guided by the size of the global opportunity. Recent performance is a reminder that international equities are an important part of a diversified portfolio, but it is not a reason to start chasing that performance by timing markets.
Don Calcagni is chief investment officer at Mercer Advisors.
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