Don’t Put All Your Eggs In One Basket
The continued media focus on artificial intelligence (AI) and U.S. large-cap stocks (S&P 500 equity index) may have led many investors to overlook the outperformance of international stocks over U.S. stocks in 2025. The MSCI ACWI Ex USA index is a proxy for non-U.S. stocks. In dollar terms, it returned 32.4% in 2025, versus 17.9% for the S&P 500.
BFA clients know we have been expecting a return to the cyclic outperformance of foreign stocks over U.S. stocks, and 2025 may have been the beginning of that cycle. One factor in the recent outperformance of foreign stocks has been the decline in the U.S. dollar (down 9.4% in 2025), which has boosted foreign stock returns. Figure 1, from Hartford Funds, shows how U.S. and international markets have moved in cycles and with the U.S. dollar since 1975, based on five-year monthly rolling returns. We are currently 14.6 years into the current cycle of U.S. outperformance. Analysts continue to forecast a declining dollar, particularly as the Fed proceeds with its easing (such as lowering rates) while other central banks have stopped easing. A lower dollar will remain a tailwind for foreign stocks.
Figure 1: U.S. Equity and International Equity 5-Year Monthly Rolling Returns (February 1975 through September 2025)
