International stocks have shown remarkable performance, surpassing the S&P 500 in early 2025, even as the latter reaches record highs. This shift has reignited investor interest in global equities, particularly as European markets report their strongest monthly returns against the S&P 500 in a decade.
Current Market Performance
The optimism surrounding international markets is bolstered by a recovering Chinese economy, despite ongoing uncertainties regarding tariffs. The performance comparison between U.S. stocks and global stocks has been a focal point since 1979, with recent data highlighting a significant resurgence for international equities.
Easing geopolitical tensions, especially related to peace negotiations in Ukraine and Gaza, have contributed to the resilience of European markets. For instance, Germany’s DAX index achieved new heights in February, driven by substantial gains in defense stocks amid discussions about military support for Ukraine.
Comparative Returns
As of February 19, 2025, global equities have returned 7.2% year-to-date, compared to a 4.5% return for the S&P 500. Over the past decade, the S&P 500 has averaged an impressive 13.8% in annualized returns, while global stocks have lagged with an average of 4.9%.
This gap has largely been influenced by the performance of American tech giants, which have driven the U.S. market to new heights. However, as valuations for U.S. stocks reach elevated levels, concerns about the sustainability of this growth arise.
Opportunities in International Stocks
In contrast, international stocks are currently perceived as more attractively valued, offering potential opportunities for investors seeking diversification. Historically, international stocks have experienced cycles of outperformance, with the last significant period occurring during the 2000s, characterized by the dot-com crash and the global financial crisis.
During this challenging decade, China’s economic growth was crucial in driving global equity returns, while the S&P 500 faced difficulties. For example, an investment of $1,000 in the MSCI Emerging Markets Index with dividends reinvested would have grown to $1,982, while the same amount invested in U.S. stocks would have decreased to $764.
Future Growth Prospects
Looking ahead, several factors could support the ongoing outperformance of international stocks. India, now the world’s most populous country, is experiencing significant economic growth driven by favorable demographic trends.
- The number of households in India with disposable incomes exceeding $10,000 has surpassed that of Japan.
- This indicates a growing consumer market that could enhance future equity performance.
Additionally, China is home to a rising number of innovative firms across various sectors, including e-commerce, automotive, and healthcare. These companies are increasingly capturing a larger share of global markets, positioning themselves for future growth.
Challenges and Opportunities
While challenges such as property market issues and the lingering effects of COVID-19 lockdowns have depressed the prices of many Chinese stocks, these conditions may present an upside for future returns. Given their historically low valuations compared to those in developed markets, there is potential for significant recovery.
As investors navigate the complexities of the current market landscape, the resurgence of international stocks presents a compelling narrative. With easing geopolitical tensions and improving economic growth prospects in key regions, global equities may be on the verge of a new era of outperformance.
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