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Written by: Jim Masturzo, CFA
U.S. equities had another strong year in 2025. Returns were impressive, headlines were dominated by large-cap growth, and investor confidence remained high. Yet a quieter and more important story unfolded beneath the surface. Non-U.S. equities meaningfully outpaced their U.S. counterparts.
That outcome should not have been surprising. Starting valuations still matter, especially over long horizons, and U.S. stocks entered 2025 priced for near perfection. Outside the U.S., the picture looked very different. Lower starting multiples, improving fundamentals, and a weakening dollar created a more favorable backdrop for global equities.
The Valuation Gap Is Hard to Ignore
One of the most persistent features of today’s market is the valuation gap between U.S. and non-U.S. stocks. U.S. equity multiples sit well above historical long-term norms, reflecting optimistic growth assumptions and continued confidence in dominant business models. By contrast, developed ex-U.S. and emerging market equities trade at far more modest valuations, closer to historical averages.
This gap matters because valuations are among the most reliable predictors of long-term returns. Expensive markets can stay expensive for a time, but they leave little margin for disappointment. Cheaper markets do not require heroic assumptions to deliver reasonable outcomes.
What the Data Shows
The performance divergence was clear in 2025. As shown below, developed and emerging market equities led global returns, outperforming U.S. stocks after years of lagging behind.
This was not a narrow rally driven by speculative capital. Non-U.S. equities benefited from attractive valuations, improving earnings expectations, and currency tailwinds as the U.S. dollar weakened. In many cases, local fundamentals mattered more than U.S. policy headlines.
Why Global Investing Feels Uncomfortable
If global stocks look attractive on paper, why do investors remain so heavily concentrated in the U.S? The answer is behavioral as much as analytical. Investors anchor to what has worked recently. Over the past decade, U.S. equities dominated, reinforcing the belief that global diversification was optional.
But cycles change. Leadership rotates. Markets that feel uncomfortable often offer the best prospective returns, while markets that feel safe tend to be priced accordingly.
A Broader Opportunity Set
Looking ahead, global diversification offers more than just return potential. It provides exposure to different economic cycles, policy regimes, and sector compositions. It also reduces reliance on a single market that is already priced for exceptional outcomes.
These themes are explored in more detail in my full 2025’s Implications for the Future: “Some Like it Hot"? The article reviews the global performance reset in 2025 and explains why valuation-based investing increasingly points investors outside the U.S.
It is a big world. Investors who limit themselves to one market risk may be missing it.
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