After greater than a decade of US market dominance, 2025 can have marked a turning point for global investors. International stocks have risen greater than their U.S. counterparts, reflected in strong earnings growth and supported by momentum from political reform and a reassessment of “American exceptionalism.”
This broad-based outperformance across Europe, Japan and emerging markets has investors wondering whether the tide is popping in favor of worldwide diversification. Is this the start of a brand new structural cycle of market leadership or simply a short-term correction after years of imbalance?
Since the Global Financial Crisis (GFC), US stocks have been the core of worldwide portfolios, benefiting from a potent mixture of dollar strength, technological innovation and economic resilience.
This “only game in town” narrative was reinforced by a record bull market in each the dollar and the technology sector, which brought unprecedented capital inflows and led investors to turn out to be structurally obese U.S. assets.
This post is the primary in a series examining whether this outperformance marks the beginning of a structural trend or simply a short lived shift, and the way global investors can prepare for it.
A historical perspective
History reminds us that market leadership is cyclical, not everlasting. Each decade brings its own defining theme – from the Nifty Fifty boom of the Sixties and early Nineteen Seventies, when a handful of blue-chip growth stocks traded at extreme valuations before dramatically underperforming – to emerging markets and commodities within the 2000s. Dominant markets often give approach to latest sources of growth and value because the cycle turns.
In 2025, this cyclical pattern appeared to reassert itself. International stocks outperformed U.S. stocks by about 17 points, with broad-based gains in Europe, Japan and emerging markets, based on MSCI indexes and Bloomberg.
While such dispersion could seem abrupt or temporary after years of U.S. dominance, it reflects a mix of narrowing growth differentials, improving corporate fundamentals internationally, and renewed political momentum in major economies.
The query facing global allocators now is whether or not this shift marks the beginning of a sustained leadership shift or merely a short lived recalibration inside a long-running US bull cycle.
The USA faced challengers
A 75-year evaluation shows that the dominant investment theme changes every decade, from the boom of the Sixties to Nineteen Seventies to U.S. technology within the Nineties to emerging markets and commodities within the 2000s. In fact, one particular investment theme (e.g. early technology) often reverses sharply in the following (see Figure 1 below).
Chart 1: Investment themes (cumulative, % return)
Source: Bloomberg, Breakout Capital
Recent memory ultimately plays a task in shaping narratives, and so the United States’ 8% annual outperformance for the reason that global financial crisis seems a given. However, history shows that US market outperformance shouldn’t be the norm. According to UBS Research and the DMS database, U.S. stocks have lagged their international peers about half the time for the reason that twentieth century (Chart 2). Looking at other high-frequency Bloomberg data, U.S. annualized returns were broadly much like international markets within the 4 a long time before the worldwide financial crisis.
Chart 2: Average annual stock market returns by decade, US in comparison with remainder of the world
Source: UBS, DMS database, 2024, breakout capital calculations. Note: Expressed in real USD
Pay attention to the fundamentals
Based on the most recent Bloomberg data, U.S. stocks are trading at greater than 22 times forecast 12-month earnings, barely below the intense levels last seen through the dot-com bubble and post-pandemic. This compares to 13 times for emerging markets and 15 times for international markets outside the US.
Investor sentiment reflects this valuation gap: More than three-quarters of equity fund flows this decade have gone to U.S. assets, in keeping with EPFR fund flow data, though the United States accounts for 65% of the MSCI global equity index and lower than 50% of worldwide gains, in keeping with data from MSCI and Bloomberg. Such an extreme valuation differential provides little margin of safety if fundamentals weaken, even when that is relative.
The fundamental outperformance of the US is now showing signs of normalizing. A key driver of previous dollar strength and earnings growth has been economic dynamism within the U.S., which has outperformed about half of emerging markets over the past five years.
Forecasts from the International Monetary Fund indicate this That advantage is fading as greater than 80% of major emerging markets are expected to grow faster than the US over the following five years.
Consensus forecasts reflect this trend: emerging markets are expected to deliver 17% earnings growth in US dollar terms over 2024-2026, in comparison with 12% for the US and just 8% for the US equal-weighted index (Chart 3).
Chart 3: Annualized Earnings Growth, USD
Source: MSCI, Bloomberg, Breakout Capital Calculations
Can the US defend its exceptionalism?
There are many elements of US exceptionalism, including a free market economy, strong institutions and an innovation ecosystem that give it a structural advantage. However, financial markets move in cycles as investor sentiment is overwhelmed. The dominance of US equities over the past 15 years has been fueled by a pro-cyclical loop between attractive post-crisis valuations for stocks and US dollars and balance sheet adjustments in each the private and public sectors.
We consider we’re in a brand new environment where there may be increasing recognition that international markets are on the mend, offering strong earnings growth and policy improvements at significantly cheaper valuations.
The strong economic benefits that the US offered 15 years ago are increasingly being eroded, setting the stage for a multi-year tailwind in favor of international markets.
- Role of the US dollar: Outperformance of international markets has historically been accompanied by periods of US dollar weakness. While much commentary focuses on the dollar’s reserve status, history shows that it has weathered several multi-year bear markets, typically lasting about seven years and experiencing a mean decline of 40% (see Bloomberg’s DXY index in Figure 4). After a 13-year uptrend and amid weaker fundamentals and rising debt, the likelihood of one other sustained dollar upswing appears slim.
Chart 4: US Dollar Index
Source: Bloomberg
- The US has now turn out to be an enormous bet on AI: Artificial intelligence has turn out to be the dominant driver of US stock performance, accounting for nearly 70% of market returns in 2025. Their influence now extends beyond the stock markets and flows into the true economy: AI-related investments contributed around 40% to GDP growth last 12 months, with additional gains from consumption via the wealth effect. This optimism has led to lower bond yields and continued high valuations. For investors, continued U.S. outperformance increasingly relies on the persistence of this AI-driven growth narrative, as also discussed in a current FT opinion piece.
- The momentum for reform has increased on international markets: After a decade of political stagnation, many economies are entering a brand new phase of structural reform. In Asia, corporate governance initiatives are gaining traction in Japan, Korea and China, while Europe is expanding fiscal capability through increased public investment. The emerging countries are also deepening their regional trade relations and strengthening the institutional framework. These shifts suggest that international markets are usually not only catching up cyclically but additionally improving structurally, a development that might help narrow valuation discounts relative to the US.
Looking ahead
After 15 years of US market leadership, the worldwide investment landscape appears to be entering a brand new phase. Valuations, growth prospects and political reform dynamics now point to a more balanced distribution of opportunities beyond US borders.
As international markets strengthen structurally and the boundaries of America’s AI-powered expansion are tested, stock leadership could expand over time. For investors, this shift suggests not only a tactical adjustment, however the early stages of a longer-term rebalancing of worldwide market performance.
References
- JP Morgan: The tide is popping for emerging markets:
https://am.jpmorgan.com/gb/en/asset-management/per/insights/portfolio-insights/investment-trust-insights/emerging-markets/tide-is-turning-for-emerging-markets - RBC Wealth Management Asia Insights:
https://www.rbcwealthmanagement.com/en-asia/insights/the-us-dollar-in-transition-cyclocal-volatility-meets-structural-shifts - MSCI Emerging Markets in a world beyond US exceptionalism: https://www.msci.com/research-and-insights/blog-post/emerging-markets-in-a-world-beyond-us-exclusionalism
- UBS Global Investment Returns Yearbook 2024:
https://www.ubs.com/global/en/investment-bank/insights-and-data/2024/global-investment-returns-yearbook.html - Ninety One, The Great Rebalancing: A New Cycle Reshaping Global Stock Governance Link: https://americanbeaconfunds.com/wp-content/uploads/2025/10/91-the-great-rebalancing-a-new-cycle-reshaping-global-equity-leadership-US-en.pdf
- Financial Times, Ruchir Sharma: America is now an enormous bet on AI
- Foreign Affairs: Emerging markets are the following comeback nations | Foreign Affairs
