International Stocks Warrant Consideration

After a year of strong outperformance relative to U.S. markets, international equities are continuing their comeback following a prolonged period of underperformance. Year-to-date returns (in USD terms) highlight the rotation: 

- MSCI Korea: +35.28% 

- MSCI Emerging Markets: +10.78% 

- MSCI Japan: +10.23% 

- MSCI Europe: +4.93% 

- S&P 500: -0.03% 

A combination of factors is driving this shift: 

- U.S. market challenges: The concentrated U.S. market has struggled this year, largely due to weakness in sectors that led performance in 2025. Investors have also begun to question the durability and timing of the AI narrative. 

- Emerging markets offer an attractive alternative: Emerging markets have become a destination for investors rotating out of U.S. mega-cap tech while still maintaining exposure to the AI theme. Near record high capital flows underscore the robust investor interest, while strength in Korea’s memory semiconductor market has meaningfully supported index performance. 

- Japan’s policy-driven expansion: Since October, Japanese equities have surged as investors embrace Takaichi’s expansionary policies. This month’s landslide victory has further reinforced the outperformance. 

- Europe’s fiscal and monetary support: Germany and other European nations are deploying substantial fiscal stimulus measures, while 2025 rate cuts are beginning to flow into economic activity and equity performance. Geopolitical tension has also contributed to higher defense spending (which is an important GDP multiplier), led by Germany. 

- Dollar weakness: A softer U.S. dollar, driven by rate differentials and government policy, has enhanced foreign equity returns for U.S.-based investors. 

The bottom line: With improving fundamentals and supportive macro conditions, international equities are becoming more than just a portfolio diversifier. While an overweight to U.S. equities still makes sense given their leadership in innovation, earnings quality, and capital efficiency, the global opportunity set is increasingly worth participating in. 

Source: Bloomberg. Returns 01/01/26—02/17/26. 

Sebastian Teper contributed to this article.