why are international stocks underperforming

This article explains why are international stocks underperforming, reviewing historical patterns, major drivers (valuation, sector concentration, dollar, policy, flows), regional differences, reve...

2025-11-19 16:00:00

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Overview and scope

This article addresses the question: why are international stocks underperforming for many global investors and what that means for portfolio decisions. Right away, note that “international stocks” here refers to non‑U.S. developed and emerging‑market equities, and underperformance is measured relative to broad U.S. benchmarks (for example, the S&P 500 or a total‑market ETF such as VTI) or against ex‑U.S. indices (for example, MSCI ACWI ex‑U.S., VXUS, IXUS). Readers will find a historical overview, a decomposition of major drivers, region‑level differences, likely catalysts for any reversal, measurement caveats, and practical investment implications—framed to be useful for both new and experienced investors.

As of Jan 12, 2026, according to Morningstar, the long multi‑year lead enjoyed by U.S. equities has prompted fresh interest in whether international markets can catch up. As of Dec 9, 2025, Fidelity's 2026 outlook highlighted similar themes around valuation gaps and policy divergence. These industry updates underline why are international stocks underperforming remains a central question for global portfolio construction.

Historical performance patterns

The U.S. equity market has noticeably outperformed many international markets since about 2010. That multi‑year phenomenon reflects a mix of factors—strong profit growth in U.S. companies, a heavy concentration of very large technology and platform companies, and notable valuation expansion in U.S. markets relative to peers.

During the 2010s and into the early 2020s, returns were led by a relatively small group of mega‑cap U.S. firms that benefited from secular digital adoption, platform economics, and later by AI‑related optimism. Across this period, valuation differences—higher price‑to‑earnings multiples and premium market sentiment—accounted for a meaningful portion of the return gap between the U.S. and international equities.

There have been episodic reversals when international markets outperformed for multi‑quarter stretches. Industry commentary around 2024–2025 highlighted a partial shift: some international markets narrowed the gap or outperformed year‑to‑date in specific periods, driven by currency moves, commodity cycles, and domestic stimuli in certain countries. As of Jan 14, 2026, the CFA Institute noted that these shifting tides raise questions about persistence and timing.

Long‑run cyclical context

Market leadership rotates. Different decades have favored different regions and sectors. For example, the 1980s and 1990s featured waves where certain international exporters or commodity producers led global returns; the 2000s saw other rotations; and the 2010s were dominated by U.S. tech growth.

Historical data show neither U.S. nor non‑U.S. dominance is permanent. Structural changes, valuations, demographic trends, policy regimes, and innovation cycles all contribute to cyclical shifts. This cyclical view helps explain why the question why are international stocks underperforming should be framed as “why now?” and “for how long?” rather than a permanent judgment.

Major drivers of international underperformance

Multiple interacting categories explain much of the observed underperformance: market structure and concentration, valuation expansion, earnings and fundamentals, currency effects, macro and policy differentials, sector composition and structural advantages, and investor behavior and flows.

U.S. market concentration and the “Magnificent Seven” effect

A notable driver has been the heavy weight of a handful of very large U.S. technology and platform companies. These firms—often grouped in industry commentary as the closest approximation to concentrated market leadership—grew market cap very rapidly and dominated index returns.

When a small number of companies account for a large share of index performance, the country index benefits even if the broader economy or smaller companies do not. This concentration magnified U.S. returns and widened the performance gap with more diversified international markets.

Valuation expansion in U.S. equities

Higher price multiples in U.S. equities explain a sizeable portion of the relative outperformance. Multiple expansion—higher P/E ratios, and in some cases higher EV/EBITDA or price‑to‑sales—meant investors paid more for future growth expectations in U.S. names than in many non‑U.S. markets.

Research decompositions typically show that relative returns can be split into earnings growth and valuation change; in the last cycle, valuation change was a dominant factor. This helps explain why many analysts ask why are international stocks underperforming when corporate profits outside the U.S. were not necessarily declining as much as relative market prices suggested.

Earnings and fundamental differentials

Fundamentals also mattered. U.S. corporate earnings growth, margin expansion, and sector mix (higher weights in technology and software, lower weights in traditional cyclical sectors) supported higher returns. Stronger profit growth in certain U.S. sectors contributed real economic gains, not just valuation moves.

That said, the relative contribution of fundamentals versus multiples varies by period. In some stretches, valuation alone drove the gap; in others, actual earnings and cash‑flow differentials were meaningful.

Currency (U.S. dollar) effects

Exchange‑rate moves are a powerful amplifier of cross‑border equity returns. For a U.S. investor, a rising U.S. dollar reduces dollar‑denominated returns from foreign assets when they are unhedged; conversely, a weakening dollar boosts those returns.

A strong dollar over multi‑year periods has therefore been a headwind to foreign equity returns in U.S. dollar terms. Changes in global reserve composition, foreign capital flows, and divergent central bank policies influence currency moves. As of June 23, 2025, Johnson Financial Group discussed the link between dollar moves and YTD international returns, illustrating the near‑term sensitivity of returns to exchange rates.

Macroeconomic and geopolitical factors

Diverging monetary‑policy paths, differing inflation dynamics, and country‑specific policy actions can advantage or disadvantage regional markets. When U.S. rates are relatively attractive, capital can flow toward U.S. assets; when other central banks ease or governments introduce fiscal stimulus, those regions can gain.

Trade and regulatory policy also matter. Tariff uncertainty, country‑level regulatory actions, and other policy shifts can weigh on investor sentiment in affected markets. Avoiding political or war commentary, we note that predictable, investor‑friendly policy settings and credible macro management tend to support equity performance.

Sector composition and structural advantages

Different markets have different sector weights. The U.S. index is tilted toward technology and consumer services, while many developed‑ex‑U.S. benchmarks have higher weights in financials, industrials, and materials. That sector mix can lead to multi‑year performance differences depending on the economic cycle and demand patterns.

Structural factors—corporate governance standards, shareholder‑friendly reforms, and capital‑market depth—also influence valuations. Markets that improve governance and embrace reforms often attract re‑rating by global investors.

Investor behavior and flows

Persistent capital inflows into U.S. equities—driven by a combination of perceived safety, liquidity, and momentum—helped sustain higher U.S. valuations. Home‑bias and benchmark‑driven allocations also shaped flows. When index‑tracking funds and passive strategies overweight U.S. mega‑caps, that creates self‑reinforcing demand.

Retail and institutional sentiment cycles can amplify moves, creating periods when markets diverge more than fundamentals alone would suggest. This helps explain why are international stocks underperforming even when some fundamentals appear similar.

Regional and market‑specific factors

Developed ex‑U.S. regions and emerging markets are heterogeneous. It is useful to separate Europe, Japan, and broad emerging markets when diagnosing performance.

Europe

Europe’s performance has been shaped by macro cycles, energy and commodity exposures, and policy responses. Periodic fiscal stimulus or support can lift local markets. As of Dec 9, 2025, Charles Schwab’s 2026 outlook emphasized Europe’s policy supports and corporate dividend yields as potential attractors for investors.

Japan

Japan has experienced corporate‑governance reforms, buyback initiatives, and structural efforts to raise returns to shareholders. These reforms helped Japanese equities perform better in select periods. Marketable valuation gaps sometimes create tactical opportunities, and Japan’s index composition differs materially from the U.S., with heavier industrial and export exposures.

Emerging markets (China and others)

China is a distinct case within emerging markets. Country‑specific regulatory actions, growth moderation, and policy responses have weighed on investor sentiment at times. As of Feb 5, 2025, Alpha Architect examined investor questions like “Is it time to ditch international stocks?” noting that China‑related risks and governance concerns were central to recent underperformance in broad EM indices.

Broad emerging markets beyond China are diverse: commodity producers can benefit from price cycles; some frontier markets show rapid growth but higher volatility. Regional contagion and global demand shifts affect returns across EM.

Why performance can revert — catalysts for international catch‑up

Several catalysts can drive periods of international outperformance:

Dollar weakening: A sustained decline in the U.S. dollar lifts dollar returns from foreign equities for U.S. investors.
Attractive relative valuations: Large valuation gaps can compress if investors re‑rate cheaper regions.
Policy stimulus abroad: Fiscal or monetary easing in non‑U.S. markets can revive growth expectations.
Recovery in cyclical sectors: If global cyclical demand improves, regions with high cyclical exposure may outperform.
Re‑weighting of global allocations: Active reallocations by large institutions or index changes can materially affect flows.

These catalysts often interact. For example, policy stimulus can improve growth prospects and currency prospects simultaneously, creating fertile conditions for catch‑up.

Risks, caveats, and measurement issues

Comparing international to U.S. performance involves nuance and potential measurement pitfalls:

Currency volatility: Unhedged returns can swing widely; hedged funds remove currency moves but add cost and tracking complexity.
Index composition differences: Different indices have different sector weights, country inclusions, and float adjustments; comparing apples to apples is crucial.
Survivorship and sector biases: Indices can be affected by which companies survive and which sectors dominate; concentration skews results.
Short‑term noise vs long‑term trends: Single‑year or single‑quarter outperformance may not indicate a durable regime change.
The risk of extrapolation: Past performance is informative but not determinative of future results.

Investment implications and strategies

Given the multi‑factor nature of why are international stocks underperforming, investors can consider several practical responses while retaining a neutral, evidence‑based approach.

Maintain global diversification

One primary rationale for global diversification is to reduce concentration risk. Holding both U.S. and non‑U.S. equities smooths idiosyncratic country‑level shocks and avoids overexposure to any single market’s valuation cycle.

Rebalance toward cheaper regions (tactically)

Some investors use systematic rebalancing to capture valuation spreads: overweight regions that are cheaper relative to long‑run averages and trim regions that have become expensive. This requires discipline and an understanding of tax and transaction costs.

Currency‑hedged vs unhedged exposures

Choosing hedged or unhedged foreign equity funds is an explicit decision about currency risk. Currency hedging reduces FX volatility but entails costs and may remove a potential source of return if the foreign currency strengthens.

Use broad ex‑U.S. ETFs or active managers

Broad ETFs like VXUS or IXUS (representing ex‑U.S. exposure) provide low‑cost, diversified access. Active management can add value in markets with wider valuation dispersion or where security selection and local knowledge matter. When selecting products, consider liquidity, tracking error, expense ratio, and the provider’s execution quality.

Bitget tools and execution

Investors seeking to implement international tilts or maintain global diversification can use reputable execution platforms and wallet solutions. For trading and custody needs, consider Bitget exchange for order execution and Bitget Wallet for custody and cross‑chain activity. Bitget provides multi‑market access, execution tools, and wallet integrations to manage exposures consistently and securely.

Hedging and product choices

Tradeoffs between hedged and unhedged funds

Hedged funds: Reduce currency swings; useful for investors prioritizing return stability. Hedging incurs costs and can underperform if foreign currencies appreciate.
Unhedged funds: Lower costs and retain potential FX upside; introduce volatility tied to currency moves.

Single‑country vs regional vs ex‑U.S. ETFs

Single‑country ETFs: Higher concentration and volatility; useful for tactical plays or targeted convictions.
Regional ETFs: Broader diversification across neighboring markets; moderate concentration risk.
Ex‑U.S. global ETFs: Maximum diversification outside the U.S.; convenient for strategic allocations.

Active vs passive approaches

In markets with larger valuation dispersion and less efficient pricing, active managers can potentially add value. Passive approaches are cost‑efficient and capture broad market returns. A blended strategy—core passive plus satellite active—can balance cost and opportunity.

Empirical studies and research findings

Academic and industry research has decomposed the U.S outperformance into valuation expansion versus fundamentals. Multiple studies (including industry notes cited below) find that a material share of the relative gap in the past decade was driven by multiple expansion rather than disproportionate earnings growth alone.

As of May 2025, Dodge & Cox published a piece outlining the case for international equities and emphasizing valuation and margin of safety arguments. As of Dec 9, 2025, Fidelity’s 2026 outlook offered a data‑driven review of international prospects. These and other reports illustrate the consensus that multiple channels—valuation, earnings, currency, and flows—explain past performance differences.

Researchers also document that reversion is possible: when valuations mean‑revert or when cyclical forces rotate, international returns can improve materially relative to U.S. indexes. This empirical background is why many long‑term investors maintain a non‑U.S. allocation despite recent underperformance.

Further evidence and industry commentary

As of Jan 12, 2026, Morningstar published analysis arguing that international diversification remains valuable even after a prolonged U.S. lead.
As of Dec 9, 2025, Charles Schwab’s 2026 outlook highlighted pockets of relative value and dividend income offered by some international markets.
As of Nov 11, 2025, NBC News reported that several countries were outperforming the U.S. year‑to‑date in specific periods, underscoring the episodic nature of leadership shifts.

These sources provide data and charts quantifying valuation gaps, flows, and relative performance across regions.

Practical checklist for investors responding to underperformance

Confirm measurement: Ensure you compare appropriate indices (market‑cap weighted vs equal‑weight, developed vs emerging).
Check currency exposure: Decide whether currency volatility is acceptable or whether hedging fits your goals.
Review valuation and fundamentals: Evaluate P/E, price‑to‑book, earnings growth, and dividend yields across regions.
Consider governance and depth: Markets with improving corporate governance may merit higher allocations.
Use rebalancing rules: Let systematic rebalancing capture mean reversion rather than timing the market.
Select execution and custody partners: Use platforms like Bitget for reliable order execution and Bitget Wallet for secure custody if you handle assets across chains or require integrated tools.

Empowered due diligence and neutral stance

All strategic changes should follow investor‑specific goals, risk tolerance, and time horizon. The facts summarized above explain why are international stocks underperforming in recent cycles and why the question merits ongoing attention. This article aims to clarify drivers and options without providing tailored investment advice.