Can International Stocks Outperform Once Again in 2026? Here's What Nobel Prize Economist Robert Shiller Has to Say.

The S&P 500 rallied 16.4% in 2025 (after +26.3% and +25% in the prior two years) but still trailed the MSCI World ex USA, which surged 32.6% aided by a weaker dollar and rotation away from the U.S. amid President Trump’s trade stance. Elevated valuations—S&P forward P/E near 22 and Shiller CAPE above 40—lead Nobel laureate Robert Shiller to forecast muted average nominal returns of ~1.5% annually for the U.S. over the next decade (95% CI: about -7.7% to +10.7%), while he projects stronger 10-year returns for Europe (8.2%) and Japan (6.5%), reflecting cheaper historic CAPE levels and regional differences in AI exposure, capital availability and tax regimes.

Analysis

Market structure: 2025’s rotation (MSCI World ex‑USA +32.6% vs S&P 500 +16.4%) favors internationally exposed cyclicals, exporters and value banks while penalizing richly priced US large‑cap growth where CAPE >40 and forward P/E ≈22 imply stretched multiples. A weakening dollar and flow rotation are the immediate demand drivers; supply of investable AI winners remains concentrated in US markets, preserving pockets of US pricing power (AI platforms, semis) even as overall US index multiples look vulnerable.

Risk assessment: tail risks include a dollar reversal (+10% DXY) that would wipe a large portion of international gains, an escalation of trade policy that disrupts supply chains, or Fed surprise tightening that forces multiple compression; Shiller’s 10‑yr nominal return median 1.5% (95% range +10.7 to -7.7) quantifies downside. Short‑term (days–weeks) volatility will track FX and Fed speak; medium (months) will be earnings and trade headlines; long (years) rests on AI earnings concentration and secular CAPE mean reversion.

Trade implications: tactically shift 3–6% gross from US large‑cap beta into developed ex‑US ETFs (VXUS, IEUR) over 1–3 months, while hedging US exposure with 3–6 month SPY put spreads sized to protect 2–4% portfolio risk. Keep concentrated US AI winners (NVDA) as selective overweight (0.5–1%) via call spreads to capture secular upside without full directional exposure.

Contrarian angles: consensus underestimates the chance that US earnings growth (AI monetization) sustains higher multiples for select names even as broad CAPE compresses — making targeted long NVDA or NVDA call spreads superior to broad SPY longs. Conversely, international cheapness may be a value trap (Japan’s distorted CAPE from 1980s highs); hedge FX risk or prefer hedged Japan exposure (FLJH) if DXY risks remain. Hedge thresholds and dynamic rebalancing are essential.

Key Decisions for Investors

• Initiate a phased 3% allocation to Vanguard Total International Stock ETF (VXUS) over 3 weeks (1% tranches) to capture valuation differential; target hold 6–18 months, take profits if VXUS rises +20% or relative outperformance vs SPY >10%; stop-loss at -8% per tranche.
• Establish a 2% long IEUR / 2% short SPY pair trade (equal dollar notional) as a relative value bet for 3–9 months; add if IEUR outperforms by 5% and unwind if S&P forward P/E compresses to ≤18 or Shiller CAPE drops to ≤35.
• Buy protective SPY put spreads to hedge broad US exposure: purchase a 3‑month 5% OTM put and sell a 10% OTM put (size to cover ~2–4% portfolio risk); cost should be targeted <1% portfolio and rolled or closed if VIX >30 or DXY >105.
• Add a tactical 0.5–1% NVDA exposure via 6–12 month call spreads (buy near‑ATM call, sell 20–30% OTM call) to capture continued AI upside while capping premium; trim if NVDA position contributes >10% of total portfolio gains or if forward guidance weakens.
• Prefer hedged Japan exposure: allocate 1–2% to Franklin FTSE Japan Hedged ETF (FLJH) instead of unhedged if DXY volatility remains >6% annualized; if DXY falls below 95, shift 50% of FLJH allocation to unhedged VXUS/Japan ETFs to regain FX upside.