3 Reasons to Invest in International Equities

Here are three compelling reasons we believe investors may want to consider increasing their allocation to international markets:

1. Earnings: Coming Together
For the past five years, the outperformance of the “Magnificent 7”—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—has led to a significant concentration of the US equity market. These seven stocks currently represent more than one-third of the S&P 500 Index weight.¹ Their earnings growth outpaced all the remaining companies in the index by more than five times during this period. Because of their dominant representation in the index, their contribution to the overall earnings growth of the US market was critical and likely added to the significant valuation expansion of the US market, compared to international markets.²   
 

The narrative appears to have shifted. Earnings growth for the Magnificent 7 has decelerated and is no longer significantly augmenting the earnings growth of the entire US market. At the same time, earnings growth for international markets was more resilient (Exhibit 2).

At the start of this year, 2025 earnings growth in the United States was expected to be close to 13% compared to international at 7%. Now, consensus calls for a much narrower differential in earnings growth between the United States and international.³

In Europe, a big push of fiscal stimulus could accelerate growth and lift GDP. For example, Germany, with much less debt than the United States relative to the size of its economy, plans to inject €500 billion (about $575 billion) into its economy. At the same time, defense spending across Europe is dramatically increasing, along with plans for infrastructure development. In Japan, companies continue to work to improve financial productivity and are becoming more shareholder focused, prioritizing better allocation of capital, which could potentially drive return on equity and, likely, earnings higher.

2. Currency: The Weight of Change

Until recently, US dollar strength bolstered domestic markets while creating headwinds for international equities. Despite strong stock returns over the past five years for the MSCI EAFE Index in local currency terms,⁴ performance was less impressive when converted to US dollars.

But the story may be changing (Exhibit 3). The US dollar has declined due, in part, to US policy uncertainty and tariff concerns. At the same time, plans for more aggressive fiscal stimulus in Europe are likely energizing international currencies, which appear to be building a position of strength.

3. Valuations: A Compelling Opportunity
Despite the outperformance of international equities year to date in 2025, valuations remain discounted when compared to the United States. As the impact of the Magnificent 7 on the overall earnings for the US market has diminished, so could some of the valuation differential.

Return on capital historically has been somewhat higher for US companies than international. This, too, contributed to higher valuations for US companies. Today, the trade-off between the return on capital and valuation for international stocks compared to those in the United States is the best it has been in more than 15 years.⁵ As many big drivers of relative outperformance for the United States have shifted, we believe this large discount could continue to support international market returns (Exhibit 4). 

Why International Now

We believe international equities are poised to make gains as some of the drivers contributing to the US stock lead are tempering. At the same time, we believe the relative valuations for international companies remain extraordinarily compelling compared to the United States, while government policy initiatives outside the US appear increasingly beneficial too.