Why international stocks can keep walloping U.S. investments in 2025

International equities are poised to continue outperforming U.S. stocks into 2025, despite recent U.S. market rallies, as evidenced by the MSCI World ex-USA Index's 16.6% YTD gain versus the S&P 500's 7.1% and significant fund flows ($116.3 billion into non-U.S. equity funds vs. $33.6 billion into U.S. funds). This trend is fueled by a weakening dollar (down 9.8% YTD) and global pro-growth factors like increased European defense spending, the AI race, and looser fiscal policies abroad. Investors are diversifying away from U.S. home-bias due to domestic policy uncertainties, including tariffs and the Federal Reserve's stance, and the increasing attractiveness of higher bond yields in non-U.S. markets.

Analysis

A significant performance divergence has emerged in 2025, with international equities substantially outperforming their U.S. counterparts. The MSCI World ex-USA Index posted a 16.6% year-to-date gain, while emerging markets rose 15.3% in the first half, both starkly higher than the S&P 500's 7.1% increase. This trend is underpinned by a confluence of macroeconomic and geopolitical factors, primarily a weakening U.S. dollar, which has fallen 9.8% YTD as measured by the ICE U.S. Dollar Index. This currency headwind for U.S. assets is supported by a clear shift in capital flows, evidenced by $116.3 billion moving into non-U.S. equity funds compared to just $33.6 billion for U.S. funds, a sharp reversal from the prior year. The shift is further fueled by pro-growth catalysts abroad, including looser fiscal policy in Europe and increased local defense spending. BlackRock highlights structural opportunities in European aerospace, defense, and semiconductor sectors, which are poised to benefit from renewed travel demand and the global AI race. Concurrently, rising bond yields in the U.K., Japan, and Germany are making non-U.S. fixed income more attractive, potentially reducing foreign demand for U.S. Treasurys and adding to the pressure on U.S.-centric portfolios.

Key Decisions for Investors

• Investors should review their portfolio for potential U.S. 'home-bias' and consider rebalancing toward developed and emerging international markets to capture the documented outperformance and diversification benefits.
• Consider tactical overweight positions in European sectors with strong fundamental drivers, specifically aerospace and defense companies benefiting from increased local spending, and semiconductor firms integrated into the global AI supply chain.
• Closely monitor the trajectory of the U.S. Dollar Index and developments regarding U.S. trade policy, as a reversal in the dollar's weakness or the implementation of proposed tariffs on EU goods represent key risks to this thesis.
• For those with fixed-income allocations, it is prudent to evaluate opportunities in non-U.S. sovereign bonds, as yields in markets like the U.K. and Germany have become increasingly competitive with U.S. Treasurys.