Going Global
The S&P 500 enjoyed another banner year in 2025. Including dividends, the index was up a total of 17.9%. It might surprise some that in the year the United States placed significant tariffs on its international trading partners, non-U.S. stocks [as measured by the MSCI All Country World Index Ex-U.S. (ACWX)] did better with a total return of 32.4%. International outperformance was broad-based, and it has continued here in this very early 2026: The ACWX was up 6% in total through January, while the S&P 500 gained just 1.5%.
There are several reasons for this performance difference. One is the impact of the dollar, whose value fell against a broad basket of foreign currencies in 2025 and in January 2026. A declining dollar is a tailwind for U.S. holders of international stocks; since those stocks are denominated in foreign currencies, they can buy more dollars when the investment is sold. Another reason is that investors might be looking for better bargains overseas after years of U.S. outperformance have left U.S. equities with elevated valuations.
Perhaps the biggest reason is that the outlook for relative earnings growth has shifted significantly. For years, U.S. companies have enjoyed greater earnings growth than their international counterparts. But as the exhibit illustrates, earnings growth for companies in both developed and emerging markets is now expected to outpace the growth of U.S. companies.
Exhibit: Global Earnings Growth
Source: Fidelity, Clayton Wealth Partners.
International markets should see boosts to growth over time from big developments:
- Europe is increasing military spending to reduce reliance on the U.S.
- Recent elections in Japan paved the way for fiscal stimulus to accelerate local growth.
- At the World Economic Forum in Davos, Chinese officials announced the intent to stimulate much-needed domestic demand.
Time will tell whether the outsized growth in foreign earnings is sustainable. It will be important to monitor because, as the exhibit shows, greater earnings growth leads to investment outperformance.
Bullish
- The Fed has restarted its rate-lowering campaign, providing relief for consumers and small businesses.
- Yields for fixed income and cash remain attractive.
- Credit spreads remain contained.
- Consumer and corporate balance sheets generally remain healthy.
Bearish
- Trade policy uncertainty is having a negative effect on consumer and business confidence.
- Housing affordability remains at a decades-low.
- Job growth has slowed to a standstill.
- Delinquency rates on consumer loans are rising.
- Russia-Ukraine war and other geopolitical concerns.
- China is experiencing a growth recession and deflation fears.
- Federal debt and deficits have ballooned.