The case for allocating to international equities

Key takeaways:

• Despite significant recent market moves, international equities still trade at a discount to their US counterparts. We believe that as an asset class, international equities merit consideration to balance a portfolio for a range of reasons.
• An allocation to international equities makes sense for diversification purposes regardless of the market environment and to benefit from a deep and diverse opportunity set.
• The market environment in 2025 still remains positioned for international equities to outperform as the valuation gap and the narrow concentration of US market leadership in a relatively small group of stocks persist.

The aftermath of the Global Financial Crisis (GFC) in 2008 ushered in an unprecedented spell of dominance for US equities. There have been several causes of this. In recent years, economic growth has been stronger in the United States than in Europe and other parts of the world, fiscal spending has been greater, regulation has been lighter and a culture of risk-taking has fostered much more innovation in key sectors like information technology (IT) and health care. US businesses have delivered on earnings growth to a much greater extent. That the rapidly growing IT sector comprises a larger share of the market has been especially important in recent years. Over a slightly longer time horizon, another significant factor was the role of the US Federal Reserve (Fed) in the aftermath of the GFC; it flooded the financial system with liquidity by keeping interest rates at historically low levels and supported bond markets with what effectively amounted to a blank check. Global debt hit a record $300 trillion in 2023, with much of the increase coming in the 15 years post-crisis. The major beneficiaries of this softening of monetary policy were the very growth-oriented businesses in consumer and technology industries that make up a significant proportion of the US market capitalization.

In this paper, we want to highlight some of the high-level reasons—both theoretical and topical—why, despite, or in some cases, because of, the US dominance of global equity markets, an allocation to international equities makes a lot of sense. First, we begin by considering why, whatever the market backdrop, there are compelling reasons to allocate to international equities. The second section examines some of the reasons why the current market environment in 2025 is potentially set up for a spell of outperformance from non-US equities.