After more than a decade of US market dominance, 2025 may have marked a turning point for global investors. International equities have surged ahead of their US counterparts, evidenced by strong earnings growth and supported by policy reform momentum and a reassessment of “American exceptionalism.”
This broad-based outperformance across Europe, Japan, and emerging markets has prompted investors to ask whether the tide is turning in favor of global diversification. Is this the start of a new structural cycle in market leadership, or simply a short-term correction after years of imbalance?
Since the global financial crisis (GFC), US equities have been the centerpiece of global portfolios, benefiting from a powerful mix of dollar strength, technological innovation, and economic resilience.
This “only game in town” narrative has been reinforced by a record bull market in both the dollar and the technology sector, drawing unprecedented capital inflows and leaving investors structurally overweight US assets.
This post is the first in a series exploring whether this outperformance marks the start of a structural trend or merely a temporary shift, and how global investors can position for it.
A Historical Perspective
History reminds us that market leadership is cyclical, not permanent. Each decade brings its own defining theme—from the Nifty Fifty boom of the 1960s and early 1970s, when a handful of blue-chip growth stocks traded at extreme valuations before dramatically underperforming—to emerging markets and commodities in the 2000s. Dominant markets often give way to new sources of growth and value once the cycle turns.
In 2025, that cyclical pattern appeared to reassert itself. International equities outperformed US stocks by roughly 17 points, with broad-based gains across Europe, Japan, and emerging markets, based on the MSCI indices and Bloomberg.
While such dispersion may seem abrupt or transient after years of US dominance, it reflects a combination of narrowing growth differentials, improving corporate fundamentals internationally, and renewed policy momentum in key economies.
The question now confronting global allocators is whether this shift marks the beginning of a sustained leadership transition or merely a temporary recalibration within a long-running US bull cycle.
The US Has Faced Challengers
Analysis going back 75 years shows that the dominant investing theme changes each decade, from the 1960s to 1970s boom to US technology in the 1990s and to emerging markets and commodities in the 2000s. In fact, a given investment theme (early technology, for example), often reverses sharply in the next (see Chart 1 below).
Chart 1: Investment Themes (Cumulative, % Return)
Source: Bloomberg, Breakout Capital
Recent memory ends up playing a role in shaping narratives, and thus the United States’ 8% annualized out-performance since the GFC seems a given. However, history shows that US market outperformance is not the norm. Since the 1900s, US equities have lagged international peers about half the time per UBS research and DMS database (Chart 2). Looking at more high frequency Bloomberg data, US annualized returns were broadly similar to the international markets in the four decades, pre GFC.
Chart 2: Average Annual Stock Market Returns by Decade, US vs Rest of World
Source: UBS, DMS Database, 2024, Breakout Capital Calculations. Note: Expressed in real USD terms
Pay Attention to Fundamentals
Based on the latest Bloomberg data, US stocks are trading at more than 22 times forward 12-month earnings, slightly short of the extreme levels last observed during the dotcom bubble and post pandemic. This compares with 13 times for emerging markets, and 15 times for international markets outside US.
Investor sentiment mirrors this valuation gap: Per EPFR fund flow data, more than three-fourths of equity fund flows in this decade have gone into US assets, even though the United States represents 65% of the MSCI global equity index and less than 50% of global earnings based on data from MSCI and Bloomberg. Such an extreme valuation differential affords little margin for safety if fundamentals weaken, even if relatively.
US fundamental outperformance now shows signs of normalization. A key driver of prior dollar strength and earnings growth was US economic momentum, which outpaced about half of emerging markets over the past five years.
International Monetary Fund projections indicate this advantage is fading as more than 80% of major emerging markets are expected to grow faster than the US over the next five years.
Consensus forecasts echo this trend: emerging markets are projected to deliver 17% earnings growth in US dollar terms over 2024-2026, compared with 12% for the US, and just 8% for the US equal weight 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-based economy, strength of institutions, and an innovation ecosystem that provides it a structural advantage. However, financial markets move in cycles as investor sentiment gets overstretched. US equities’ dominance over the last 15 years was helped by procyclical loop between attractive post crisis valuations for stocks and US dollar and balance sheet clean-up for private as well as public sector.
We believe we are in a new regime where there will be an increased recognition that international markets are on the mend and offer strong earnings growth and policy improvement at much cheaper valuations.
The strong cyclical advantages that the US offered 15 years ago are increasingly being chipped away creating the conditions for a multi-year tailwind in favor of international markets.
- Role of US Dollar: International market outperformance has historically aligned with periods of US dollar weakness. While much commentary focuses on the dollar’s reserve status, history shows it has endured several multi-year bear markets, typically lasting around seven years and averaging a 40% decline (see the DXY Index from Bloomberg in Chart 4). After a 13-year bull run and amid softer fundamentals and rising debt, the likelihood of another sustained dollar upswing appears low.
Chart 4: US Dollar Index
Source: Bloomberg
- US has become one big bet on AI now: Artificial intelligence has become the dominant driver of US equity performance, accounting for nearly 70% of market returns in 2025. Its influence now extends beyond stock markets and flows to the real economy: AI-related investments have contributed roughly 40% to GDP growth last year, with additional gains from consumption via the wealth effect. This optimism has supported lower bond yields and sustained elevated valuations. For investors, continued US outperformance increasingly hinges on the durability of this AI-driven growth narrative, as was also discussed in a recent FT Opinion Piece.
- Reform momentum has picked up in the international markets: After a decade of policy stagnation, many economies are entering a new phase of structural reform. In Asia, corporate governance initiatives in Japan, Korea, and China are gaining traction, while Europe is expanding fiscal capacity through increased public investment. Emerging markets are also deepening regional trade links and strengthening institutional frameworks. These shifts suggest that international markets are not only catching up cyclically but also improving structurally, an evolution that could help narrow valuation discounts relative to the US.
Looking Ahead
After 15 years of US market leadership, the global investment landscape appears to be entering a new phase. Valuations, growth prospects, and policy reform momentum now point toward a more balanced distribution of opportunity beyond US borders.
As international markets strengthen structurally and the limits of America’s AI-led expansion are tested, equity leadership may broaden over time. For investors, this shift suggests not merely a tactical adjustment, but the early stages of a longer-term rebalancing in global market performance.
References
- J.P. Morgan: The tide is turning 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-cyclical-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-exceptionalism
- 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 Equity Leadership 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 one big bet on AI
- Foreign Affairs: Emerging Markets Are the Next Comeback Nations | Foreign Affairs
This article reflects the personal views and opinions of the author and is provided for informational and educational purposes only. It does not constitute investment advice, a recommendation, or an offer to buy or sell any securities or investment strategies. The views expressed do not necessarily reflect those of CFA Institute or any organization with which the author is affiliated, including any SEC-registered investment adviser. Any references to market performance, valuations, forecasts, or third-party data are illustrative in nature and should not be relied upon as a basis for investment decisions.
