The rest of the world is trouncing the U.S. stock market. Why that could continue

International stocks, as measured by the iShares MSCI All Country World Index ex U.S. ETF (ACWX), have significantly outperformed the S&P 500 in 2025, rallying over 14% compared to the S&P 500's marginal gains and hitting a closing record high. DataTrek Research suggests this outperformance, driven by a weakening dollar (down 8% YTD) and evolving U.S. trade policies, may signal a regime shift favoring international markets, prompting recommendations to maintain or increase allocation to non-U.S. equities; Bank of America also notes a technically constructive picture for ACWX.

Analysis

International equities, exemplified by the iShares MSCI All Country World Index ex U.S. ETF (ACWX), have demonstrated significant outperformance relative to U.S. stocks in 2025, with ACWX rallying over 14% year-to-date and achieving a new closing record high, while the S&P 500 has only seen marginal gains and remains 3.8% below its February all-time high. This divergence is statistically notable, as DataTrek Research highlights that international stocks have outpaced the S&P 500 by more than three standard deviations over the past 100 days, an infrequent occurrence observed only twice before since 2010. Historically, such periods have often preceded a U.S. market rebound, but Nicholas Colas of DataTrek suggests a potential "regime shift" is underway, with capital potentially continuing to flow out of the U.S. dollar and U.S. equities due to diversification needs and fundamental factors. Supporting this, the dollar index has fallen 8% in 2025, partly influenced by concerns over evolving U.S. trade policies, including tariffs announced in April. A weaker dollar typically benefits non-U.S. markets by making dollar-denominated goods cheaper and amplifying non-U.S. returns when converted back to dollars. This tailwind has contributed to strong year-to-date performance in specific international markets, such as the iShares MSCI Emerging Markets ETF (EEM) up 10%, iShares MSCI Japan ETF (EWJ) up 11.7%, and iShares MSCI China ETF (MCHI) up 15.3%. Furthermore, Bank of America's technical analysis indicates a constructive outlook for ACWX, with its 50-day moving average rising and its 14-week Relative Strength Index (RSI) above 65, suggesting potential for continued upward trending based on Fibonacci measures.

Key Decisions for Investors

• Investors benchmarking against global equities or concerned about missing non-U.S. gains should consider maintaining or increasing allocations to international stocks, such as ACWX, particularly over the next few months.
• Monitor U.S. dollar movements and trade policy developments, as these are key drivers for the relative performance of international versus U.S. equities.
• Consider DataTrek's suggestion to index weight rest-of-world stocks, potentially around a 36% allocation, as a strategic approach to capture ongoing international market strength while acknowledging long-term U.S. equity bullishness.