International equities: 2025 revival may be the start of a longer-term revival

Key reasons for international equity allocation

• Diversification Benefit: The dominance of a few mega-cap names in the US highlights one of the enduring arguments for international investing: diversification. Investing internationally provides broader exposure to various geographies, and industries. This diversification reduces risks tied to specific sectors or countries and lessens dependence on a narrow group of growth companies.
• Developing Drivers: Investing internationally means participating in global structural trends such as energy transition, infrastructure investment, and defense spending. In Europe, there is a big push of fiscal stimulus reinforcing investment in dual-use technologies, automation, and cybersecurity, supporting a multi-year cycle of capital spending.  Japan, meanwhile, continues to benefit from the latest phase of Abenomics, where ongoing corporate governance reforms, wage growth, and shareholder-return initiatives are supporting both earnings and market participation.
• Discounted Opportunity: Even after strong gains earlier in the year, forward price-to-earnings ratios remain significantly lower outside the United States.  It is true a softer US dollar has amplified returns for international equities, but it is not a prerequisite for outperformance. International markets have often delivered strong results even when the dollar is stable. Factors such as local economic growth, corporate earnings momentum, valuation catch-up, sector composition, and policy reforms historically have played a more decisive role in driving returns. Currency should be viewed as a potential tailwind, not the main rationale for global diversification. 

2025 belies a long spell of US outperformance

As we explain in this paper, international equities have opened a clear lead over the United States through the first three quarters of 2025, outperforming by around ten percentage points. The gap emerged early in the year, marking one of the strongest starts for developed markets outside the United States in over a decade, and it has persisted as investors rotated toward attractively valued markets and sectors with different factor exposures, particularly financials and industrials. A softer US dollar has amplified overseas returns in dollar terms, while policy support in Europe, including large-scale infrastructure and defence initiatives, has reinforced sentiment.

Our conclusion: It’s not too late

Making the case for international equities does not mean turning away from US markets. The United States remains home to many world-class companies, and its innovation ecosystem continues to lead in transformative areas such as artificial intelligence and biotechnology. However, the case for international investing has never been about choosing one market over another. It is about recognizing that compelling opportunities exist beyond US borders—often at more attractive valuations, with different sources of growth and risk.

For investors who have been underweight international equities, it is not too late to reconsider. The long-term opportunity remains intact, and recent market dynamics suggest that the tide may be turning. Valuation gaps are still wide by historical standards, diversification benefits are clear, and early signs of a sustained rotation are emerging. Add to this the potential tailwinds from currency trends, policy support in key regions, and a broader earnings recovery, and the argument for a more balanced global allocation becomes stronger. In an environment where leadership is likely to be more dispersed than in the past decade, international equities deserve a closer look as part of a forward-looking portfolio strategy.