Remember those years when investing in US stocks felt like the only sensible choice? No matter what was happening elsewhere in the world, American markets just kept powering ahead, delivering returns that left the rest of the pack in the dust. It became almost an article of faith among investors: buy America, and everything else will take care of itself.
Well, 2025 threw a bit of a curveball at that idea. For the first time in quite a while, US equities didn’t lead the charge. In fact, they lagged behind much of the developed and emerging world. It’s got a lot of people asking the same question: has the long reign of US stock market exceptionalism finally come to an end?
A Surprising Turn in 2025 Market Performance
Let’s start with what actually happened this year. Global stocks, as measured by broad indices covering both developed and emerging markets, posted impressive gains around 18% in local currency terms. That’s a strong performance by any historical standard, especially after the sharp sell-off we saw early in the year.
The US market did well too—around 16%—which is certainly nothing to complain about. But here’s the kicker: that return was roughly in line with Europe as a whole and actually trailed many individual countries, including the UK and Japan. Emerging markets did even better in many cases.
And if you’re an international investor looking at returns in your home currency, the picture looks worse for the US. The dollar weakened noticeably over the year, meaning those 16% gains translated into even less when converted back from dollars. Suddenly, holding assets almost anywhere else felt like the smarter move.
This reversal caught most strategists off guard. At the beginning of 2025, the consensus view was that America would continue its dominance, driven by tech innovation and robust corporate earnings. Instead, we saw a more balanced global rally.
What Drove the Early-Year Volatility?
Much of the drama stemmed from trade policy uncertainty. Early in the year, aggressive tariff threats triggered a significant market drop. Investors feared a full-blown trade war that could derail global growth.
But things calmed down faster than many expected. Negotiations led to deals—some substantive, others more symbolic—that eased immediate concerns. Central banks around the world also began loosening monetary policy, providing additional support to risk assets.
I’ve always thought markets have a way of pricing in the worst-case scenario quickly, then rebounding when reality proves less catastrophic. That’s pretty much what played out here. The rebound was swift, and by year-end, stocks were hitting new highs in many regions.
Still, the full impact of trade frictions might not be felt yet. Supply chains take time to adjust, and corporate profit margins could face pressure down the line. For now, though, investors seem willing to look past those risks.
Valuations Tell a Compelling Long-Term Story
Performance in any single year can be influenced by all sorts of temporary factors. But when we zoom out and look at valuations, the case for international outperformance starts to look more structural.
Right now, major US indices trade on forward earnings yields around 4.5%. That means for every dollar you invest, you’re effectively buying about 4.5 cents of expected earnings.
Compare that to other regions:
- Europe offers earnings yields over 6.5%
- Japan sits around 6%
- Emerging markets provide close to 7.5%
In theory, earnings yield serves as a rough proxy for long-term real returns. Companies either pay out earnings as dividends or reinvest them for growth—either way, starting with a higher yield gives you a head start.
Of course, theory and reality don’t always align perfectly. Growth rates matter enormously. The US has delivered superior earnings growth for years, justifying richer valuations to some extent.
But the gap has widened to a point where America would need to maintain dramatically higher growth indefinitely to justify current prices. That’s a tall order, especially as other economies mature and innovate.
The higher the starting valuation, the greater the burden on future growth to deliver acceptable returns.
Perhaps the most interesting aspect is how persistent US outperformance has shaped investor behavior. Many portfolios remain heavily overweight American stocks simply because “that’s where the returns have been.” Breaking that inertia takes time.
Sector Composition and Growth Drivers
One reason US markets commanded premium valuations was concentration in high-growth sectors, particularly technology. The magnificent seven—or whatever we’re calling them these days—drove enormous gains.
But other regions have their own strengths. Europe boasts world-class companies in luxury goods, industrials, and healthcare. Japan has rebuilt its corporate governance and seen renewed investor interest. Emerging markets offer exposure to commodities and younger demographics.
In my experience, markets go through cycles of leadership. Sectors and regions take turns shining. Tech dominance won’t last forever, just as energy or financials had their moments in previous decades.
Currency movements add another layer. A weaker dollar makes foreign assets more attractive to US-based investors and boosts reported earnings for American multinationals—wait, no, actually the opposite for the latter. It’s complicated, but currency trends often reinforce performance shifts.
Historical Perspective on Market Leadership
Looking back over decades, no single market dominates forever. The US enjoyed exceptional runs in the 1990s and again post-financial crisis. But there have been long stretches where other regions led.
From 2000 to 2010, for instance, emerging markets dramatically outperformed developed worlds, including the US. Resource-rich economies benefited from commodity supercycles and rapid industrialization.
Japan’s bubble era in the late 1980s is another extreme example, though that ended badly. The point is that leadership shifts happen, often lasting years or even decades.
What triggers these shifts? Sometimes it’s valuation reversion. Sometimes policy changes. Sometimes technological or demographic trends. Usually, it’s a combination.
Right now, we see elements of all three. Valuations favor non-US markets. Monetary policy is easing globally. And growth drivers are diversifying beyond US tech giants.
Implications for Portfolio Construction
So what should investors do with this information? First, recognize that home bias—overweighting your domestic market—can be costly over long periods.
Many American investors hold 70-80% US stocks, far above America’s roughly 60% weight in global market capitalization. International investors often have less extreme bias but still underweight their opportunities.
Diversification isn’t just about risk reduction; it’s about capturing return opportunities wherever they arise. A globally balanced portfolio smooths the ride and potentially enhances long-term results.
- Review your current geographic allocation
- Compare it to global market weights
- Consider gradually rebalancing toward underweight regions
- Use low-cost index funds or ETFs for broad exposure
- Reassess periodically but avoid frequent tinkering
Personally, I’ve found that maintaining a disciplined allocation framework helps avoid chasing last year’s winners. It’s tempting to pile into whatever performed best recently, but that often means buying high.
Risks to the International Outperformance Thesis
To be fair, there are solid arguments for continued US leadership. Innovation remains concentrated in America. Regulatory environments in some other regions can be challenging. Political risks vary.
The dollar’s reserve currency status provides unique advantages. During global stress, investors often flock to US assets, supporting prices even when fundamentals weaken.
Productivity growth driven by AI and other technologies could keep US earnings expanding faster. If adoption accelerates globally but profits accrue disproportionately to American companies, the valuation premium might persist.
It’s also possible that 2025 proves an anomaly. One year’s underperformance doesn’t make a trend. We need sustained evidence before declaring the exceptionalism era over.
Looking Ahead to 2026 and Beyond
Predicting next year’s market leadership is notoriously difficult. Economic cycles, policy decisions, and unforeseen events all play roles.
But from a longer horizon—say five to ten years—the odds seem tilted toward better relative performance from non-US markets. Starting valuations matter enormously over such periods.
That doesn’t mean abandoning US stocks entirely. America’s market will likely continue delivering solid absolute returns. But expecting it to dramatically outperform the rest of the world indefinitely feels increasingly optimistic.
In many ways, this potential shift represents a healthy rebalancing. Capital flows toward more attractive opportunities, encouraging better resource allocation globally. Investors who adapt early stand to benefit.
The investment world is vast and full of opportunities. Perhaps it’s time to broaden our horizons beyond the familiar comfort of US exceptionalism. After years of American dominance, a more balanced global market might be exactly what long-term investors need.
Whatever happens in 2026, maintaining geographic diversification seems prudent. The era of blindly betting everything on one market may finally be drawing to a close. And honestly? That might not be such a bad thing.
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