International Stocks Outpace US: Rebalancing Your Portfolio for Global Growth

The investment landscape for 2024 is undergoing a significant transformation, with international equities currently outperforming their U.S. counterparts by a notable margin. This trend is prompting a fundamental re-evaluation of long-held portfolio allocation strategies. Following an extended period of U.S. market dominance, this reversal in performance underscores the evolving dynamics of global economic growth and corporate profitability, signaling a potentially more balanced environment for capital deployment and offering new opportunities for diversification.

• Historically, U.S. stocks achieved an average annual return of 13.5% between 2010 and 2024, significantly outpacing international equities, which averaged 4.8%.
• The first half of 2024 witnessed a dramatic shift, with non-U.S. stocks surging by 18.2%, far exceeding the 5.6% gain observed in the U.S. market.
• Key macroeconomic factors driving this divergence include decelerating U.S. corporate earnings, an expected 6-7% annual growth in international developed markets, and Europe’s pivot to fiscal stimulus.
• A substantial valuation gap persists, with U.S. equities trading at 23 times expected earnings compared to 14 times for international stocks.
• Financial advisors are increasingly recommending greater international exposure, with suggestions ranging from 30-40% allocation to aligning with global market weights (reducing U.S. allocation to approximately 65%).
• Specific investment avenues include broad market index funds, active funds, and targeted international companies in AI infrastructure and healthcare sectors.

Historically, the period between 2010 and 2024 saw U.S. stocks deliver a robust average annual return of 13.5%, significantly outperforming international equities, which managed an average of 4.8%, according to data compiled by Morningstar. However, the first six months of 2024 have marked a dramatic turnaround. During this period, non-U.S. stocks have surged by an impressive 18.2%, considerably surpassing the 5.6% gain recorded in the U.S. market. This recent performance differential suggests a notable shift in global investment opportunities, challenging previous paradigms of market leadership.

This recent divergence in market performance can be attributed to several underlying macroeconomic factors. Drew Pettit, a strategist at Citi (C), highlights the deceleration in U.S. corporate earnings growth, contrasting it with an anticipated 6% to 7% annual growth in international developed markets over the next five years. Furthermore, Europe’s strategic pivot from fiscal austerity to economic stimulus is providing a significant tailwind to its markets, while persistent concerns regarding the burgeoning U.S. national debt continue to weigh on investor sentiment. The valuation gap further accentuates this trend; U.S. equities currently trade at a price-to-earnings multiple of 23 times expected earnings, a stark contrast to just 14 times for international stocks, as reported by Yardeni Research. This notable valuation disparity suggests that international markets currently offer more attractive entry points for investors, implying higher potential returns should earnings growth align with current projections.

Given these evolving market dynamics, financial advisors are increasingly advocating for greater international exposure within client portfolios. Rick Ferri, a Texas-based financial advisor, recommends allocating between 30% and 40% of a portfolio to international equities, emphasizing the enhanced diversification benefits this strategy provides. Citi also advises clients to align their portfolio exposure with global market weights, a strategy that would imply a reduction in U.S. allocation to approximately 65% of an equity portfolio, reflecting the broader composition of the global economy.

Strategic International Investment Avenues

For investors seeking to capitalize on global exposure, several strategic avenues are available. Broad market index funds, such as Vanguard Total World Stock Index (VTWAX) and iShares MSCI ACWI ETF (ACWI), offer comprehensive access to international markets, providing diversified exposure across geographies and sectors. Additionally, active funds like American Funds EUPAC (AEPGX), New World (NEWFX), Dodge & Cox International (DODFX), and Goldman Sachs GQG Partners (GSIMX) are frequently cited by analysts for their potential to identify undervalued or high-growth international opportunities. Goldman Sachs (GS) has specifically identified a number of international companies poised for significant growth, particularly within technologically driven sectors. This includes Schneider Electric (SU, France) and Iberdrola (IBE, Spain), recognized for their critical roles in supporting the infrastructure of AI-driven data centers, alongside Siemens (SIE, Germany) for its leadership in advanced industrial robotics. In the healthcare sector, top picks include AstraZeneca (AZN), Sanofi (SAN), GSK (GSK), and BioNTech (BNTX), reflecting ongoing global innovation in pharmaceuticals and biotechnology that offers compelling investment prospects.