For much of the past decade, the US stock market has dramatically outperformed its global counterparts. A major reason is the emergence and dominance of the US technology sector and the rapid expansion of "mega-cap" companies such as Alphabet (Google), Apple, Meta, Microsoft, Amazon, Tesla, and Nvidia. However, there are signs that international equities may be making a comeback.

Thus far this year, international stocks are enjoying higher returns than those of US firms by some measures. This phenomenon has not been limited to a single region, as numerous markets have shown impressive gains. Historically, the performance leader has swung from the US to the rest of the world and back multiple times, and several key factors are contributing to this current shift.

One reason is the high values of US stocks, particularly in the technology sector, which have been trading at a significant premium compared to international equities. Price-to-earnings ratios for US stocks have been higher for quite a while. In fact, the valuation gap is the widest that it has been in decades. As a result, other major markets are becoming a more attractive proposition for value-seeking investors.

In addition, many countries began easing up on monetary policy before the United States. The Federal Reserve has not yet reduced interest rates this year (following three moves in 2024), while central banks elsewhere (particularly in Europe) have implemented cuts. Much of this pattern stems from the potential inflationary effects of tariffs and the resilience of domestic growth. Nonetheless, this approach has put US economic prospects and corporate earnings at a comparative disadvantage.

Another factor is that, while US market strength has been highly concentrated in relatively few technology-oriented stocks, other sectors, such as financials and industrials, are now showing some momentum. These segments are more heavily represented in international markets, thus enhancing the attractiveness of global investments.

Despite the performance of international stocks, investors have been slow to shift until recently. There is growing acknowledgment of the risks associated with concentration in the US market due to high valuations and the importance of a small number of firms to overall returns. Additionally, US firms are affected by various domestic policy issues which have brought unprecedented uncertainty and notable volatility of late (though many nations face significant challenges).

International markets are gaining significant ground due to more attractive valuations, favorable monetary policy, and a different mix of companies. The underlying driver of stock markets is expected firm profitability which is in turn dependent on economic conditions and innovation. While the US equities markets will remain the gold standard, there are definitive signs that global dynamics are shifting. The coming months should be quite interesting to watch. Stay safe!