After a Blistering First Half of the Year, Can Non-US Equities Continue to Outperform US Peers?

Yes, we believe a combination of attractive valuations, a shifting macro and policy environment, and stretched US profitability will allow non-US equities to continue outperforming. The overvalued US dollar may also reduce the attractiveness of US assets to foreign investors while acting as a tailwind for USD investors allocating to foreign assets.

During the first half of 2025, the MSCI ACWI ex US Index outperformed the MSCI US Index by around 11 percentage points (ppts) in USD terms. While sizable, this outperformance follows a decade during which non-US stocks underperformed US equivalents by almost 7 ppts annualized and still leaves non-US equities attractively valued. For instance, the MSCI ACWI ex US Index trades at 14 times forward earnings, close to its historical median, and at approximately a 35% discount to US equivalents trading near record highs.

Non-US stocks are supported by an improving growth outlook. While the 2025 US GDP growth forecast has been trimmed, in part due to policy-related uncertainty, forecasts for peers have been more stable as many governments have both ample capacity and cause to boost spending. As examples, Germany—where debt-to-GDP is roughly half that of the United States—has announced significant additional spending on infrastructure and defense, while China increased its budget deficit target to 4% of GDP.

US economic growth has been stronger than that of its peers in recent years, boosted by rising government spending. However, the associated increase in debt is limiting other policy levers that otherwise might support growth. High interest rates are causing US home sales to stagnate and may contribute to declining auto sales, but the Federal Reserve has been slow to cut, given the inflationary prospect of tariffs. In contrast, other central banks like the European Central Bank and the People’s Bank of China have cut rates, which should reduce borrowing costs and stimulate growth.

US equity outperformance has been supported by superior profitability and earnings growth. The MSCI US Index has seen earnings grow around 8% per annum over the past decade, roughly twice the pace of non-US peers. Still, this earnings growth has not been widespread. Excluding the so-called Magnificent 7, S&P 500 earnings growth was negative in 2023, just 4% in 2024, and is expected to remain 4% in 2025. Concentrated EPS growth makes the US equity rally vulnerable if just a handful of companies encounter headwinds. While the lower profitability of non-US companies has many drivers—including higher regulatory burdens and reduced scale—it also means there is room for margin expansion, due to rising fiscal stimulus and falling commodity prices. The latter should especially help non-US equity indexes, given larger weights for sectors like industrials.

Proposed US tariffs are a headwind for foreign companies that sell into the US market but not a reason to ignore non-US stocks. Many international equity indexes generate surprisingly little revenue in the United States; for example, less than 5% of the MSCI China Index revenue comes from the United States. Further, some of the proposed tariffs—if enacted—could hurt US companies that manufacture abroad (e.g., consumer technology firms that manufacture in China) and hurt US firms if they face retaliation.

The overvalued US dollar is a related consideration. The combination of an expensive dollar and an administration that seeks to lower the value of the currency lessens the attractiveness of USD assets to non-US investors and increases the allure of foreign equities for US investors. This helps explain why inflows to non-US equity funds have recently outpaced those of US equity funds. A declining US dollar could lower the value of US revenue for some foreign companies, but for many, this would be at least partially offset by US operations.

Summing up, non-US equities have outperformed in 2025, and we expect them to continue to do so. US equities appear overvalued by most metrics and underlying earnings growth has not been uniformly distributed. Prospects for economic growth in other regions look more promising than in the United States. Many countries have both ample capacity and intention to stimulate growth, which in turn should boost non-US earnings growth. While the policy backdrop is evolving and tariff tension could rise again, many foreign companies are relatively insulated from these tariffs. Putting aside US equity valuations, an overvalued US dollar is causing many foreign investors to reconsider the attractiveness of US assets and is likely to continue boosting inflows and potentially valuations for non-US stocks.