Americans who failed to jet off to Europe − or even more exotic locales − when the pandemic was ending and the dollar was surging are getting a second chance for international fun. This time, they don’t even have to leave home.
International stocks are enjoying breakout performances this year, in many cases leaving their US counterparts far behind. It’s a big turnaround from the past few years when American stock indexes proved to be world-beaters.
As of mid-September, the S&P 500 was up a not-too-shabby 13% for the year. This is even more impressive considering the index that tracks America’s largest public companies returned 25% in 2024 and 26% in 2023, including dividends. (Of course, the S&P 500 did have a major stumble in 2022, sinking by more than 18%. But the recovery rally through 2025 to date has still been nothing short of a tidal wave.)
But now check out the goings on in foreign stocks so far in 2025.
European stock returns through mid-September, as represented by the iShares Europe ETF (IEV), were up 25%, almost double the S&P’s return. Emerging market stocks, as embodied by the iShares MSCI Emerging Markets ETF (EEM), rose 26% over the period.
Meanwhile, Chinese stocks are enjoying a spectacular run this year, despite tariff and trade uncertainty, as evidenced by iShares China Large-Cap ETF (FXI) rising 35%. Even Japanese stocks are strong, with the widely held iShares MSCI Japan ETF (EWJ) up over 20% in the period.
As to what’s driving the bull run in foreign stocks and whether it will sustain its lead over US equities, advisors say it reflects global investors reacting to Trump-era trade risks, fading US exceptionalism, and a sharply weaker US dollar. In advisors’ view, these and other forces created a powerful catch-up trade and will continue to help funnel capital overseas in an investor rotation out of expensive US assets.
That said, some strategists, including Jim Thorne, chief market strategist at Wellington-Altus Private Wealth, feel these fears are likely overstated and the recent foreign domination may be short-lived.
“US earnings power and innovation remain unmatched, and as valuations recalibrate, the period of international and emerging market outperformance may soon run its course,” Thorne says.
Andrew Almeida, director of investments at XYPN, believes this year’s performance in international markets has been predominantly driven by dollar weakness and price movement off deeply depressed “base-level” valuations globally as compared to the US.
“We think a majority of the movement down in the dollar is baked into the forecast for next year, with more visibility into rate cuts. Thus, the benefit to global equities from dollar weakness will contribute a lower magnitude toward nominal international returns for next year,” Almeida says.
European equities have benefited from a receding US dollar, discounted valuations, and global rotation out of expensive US assets. But this has been a catch-up rally on valuation, not on earnings power, according to Thorne.
“The performance gap may have closed; without renewed earnings drivers, further upside likely fades as fundamentals reassert. A possible sovereign debt crisis, over regulation, do not bode well for long term European fundamentals,” Thorne says.
Due to his caution on the region, he recommends a modest 3 − 5% allocation, preferably via ETFs or diversified European mutual funds rather than concentrated stock picks.
Randy Carver, president and CEO of Carver Financial Services, agrees that European stocks still face notable risks despite their impressive performance to date, including modest growth, political instability, inflation pressures, and heavy reliance on global trade. Given these vulnerabilities, he remains cautious and is therefore minimizing overall foreign exposure to 10−15% of his portfolio.
“At the end of the day, we believe that people should have some international exposure and believe that emerging markets still offers growth potential, but we are heavily weighting to the US,” Carver says.
On the flip side, Stuart Katz, chief investment officer with Robertson Stephens, is still constructive on Europe. He points out that expectations for European equities were extremely low at the beginning of the year, when they traded at a multi-decade P/E discount versus US equities and traded at a discount to historical averages compared to their own history. After this year’s rally, they’re still trading at a historically cheap discount to the long-term average discount to the US.
“While no longer cheap versus their own historical averages, the appreciation is reflective of the ‘game-changing’ multi-year fiscal spending catalyst announced this year. In some sectors, like defense, this has been priced in, where valuations may appear to some investors less attractive, but generally this is a long-term catalyst,” Katz says.
The sharp early gains in EM are already in the books, but Carver believes the backdrop of moderating US policy, resilient growth, and ongoing structural tailwinds can keep the story going, albeit with more volatility and dispersion across countries.
“In short, the outlook remains cautiously optimistic, with long-term fundamentals supportive, but investors should expect a bumpier ride going forward,” Carver says, adding that he generally allocates 5−10% in EM while avoiding China − for example, with Columbia EM Core ex-China ETF (XCEM).
Robertson Stephens’ Katz is also sticking with EM stocks, saying they remain attractive given record-high valuation gaps versus developed markets, improving quality and diversity of opportunities, accommodative central banks, increasing trade among the EM countries, and the potential for further USD weakness.
Wellington-Altus’ Thorne sees EM fundamentals still lagging the world-leading pace of US innovation, which he feels is “easy to overlook in a catch-up cycle.” In his opinion, a continuation of the EM rally depends on global liquidity, the path of the dollar, and whether EM earnings momentum can sustain relative to US tech leadership. As a result, he says a prudent allocation is 3−5% of client portfolios, primarily using liquid, diversified vehicles like broad ETFs or actively managed EM funds.
“I would focus on India, which leads on domestic growth and reform, and select tech/geopolitical winners. Individual equity selection is challenging given country and sector dispersion,” Thorne says.
The macro drivers of Japanese growth have changed somewhat this year, according to Katz. Back in 2023 and 2024, the main driver was the yen’s weakness, benefiting exporters. Obviously, that is a double-edged sword for US investors. Now it is reflation and interest rate/yield curve normalization, benefiting more domestic companies, in Katz’s opinion.
“Remember, the Bank of Japan (BOJ) policy rate was negative for eight years until early 2024, whereas it was raised to +0.5% in January, with prospects for further hikes. CPI inflation is still over 3%. Ultimately, that is driving accelerating nominal GDP growth to mid-single digit levels for the first time since the 1980s and helping the yen stabilize/strengthen,” Katz says.
The longer-term question is how consumer and corporate behaviors and spending patterns, will change as Japan moves out of its longstanding disinflationary environment. Bulls can also point to a general underlying dynamic of improving corporate governance, disclosure, and capital discipline in Japan, encouraged by the Tokyo Stock Exchange.
Thorne also sees Japanese equities benefiting from needed structural reforms, improved corporate governance, and a weaker yen. Put them all together and it supports higher valuations and international inflows, in his view.
“These changes differentiate Japan from a typical catch-up thesis and position it for more sustainable gains,” Thorne says, adding that the recent resignation of the prime minister suggests a “shift back to the center” in politics and economic policies.
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