U.S. stocks falter, overseas stocks rally: start of a tectonic shift?
International stocks have strongly outperformed their U.S. counterparts to start the year. Is this a sustainable market trend or just a blip on the screen?
The week of March 3, 2025, punctuated the trend of international equity outperformance as we saw a sharp shift in investor sentiment from U.S. to international equity markets, with the latter surging on growing hopes of fiscal stimulus measures (particularly coming out of China and Germany) and a 25 basis point interest rate cut by the European Central Bank (ECB).
In a reversal of the prevailing trend observed for much of the past few years, the MSCI EAFE Index and the MSCI All Country World (MSCI ACWI) ex-USA Index both outperformed the S&P 500 Index, which lost ground for the week amid mounting investor worries about U.S. trade policy (tariffs) and the risk of a slowing U.S. economy in the months ahead—what we’re currently calling a U.S.-only growth scare. More cyclical S&P 500 Index sectors such as consumer discretionary and financials were hit the hardest last week.
What in the world is going on with international equities?
From a historical standpoint, the gap by which non-North American stocks outpaced their U.S. counterparts over the mere span of a week was a massive outlier. In fact, a one-week outperformance of such magnitude has occurred less than 1% of the time over the past 25 years and has typically followed bouts of recession and/or bear markets, such as the 2008 global financial crisis and the 2020 COVID pandemic. During those past periods, in contrast to last week, markets had been down before switching to a recovery mode that lifted the fortunes of cyclical stocks levered to global economic growth. That makes last week’s geographic performance pattern—with international beating U.S. stocks by a wide margin—even more unusual relative to history.
U.S. vs. international stocks: largest weekly outperformance gaps over the past 25 years
| Date (week ended) | S&P 500 Index return (%) | MSCI ACWI ex-USA Index (USD) return (%) | International outperformance vs. U.S. (%) |
|---|---|---|---|
| Dec 12, 2008 | 0.48 | 8.93 | 8.45 |
| Mar 20, 2020 | -14.95 | -7.61 | 7.34 |
| Mar 28, 2008 | -1.04 | 5.15 | 6.19 |
| Mar 7, 2025 | -3.06 | 2.62 | 5.68 |
| Nov 4, 2022 | -3.31 | 2.12 | 5.43 |
| Mar 20, 2009 | 1.59 | 6.94 | 5.35 |
| Jul 19, 2002 | -7.98 | -2.87 | 5.11 |
| May 20, 2022 | -3.00 | 1.97 | 4.97 |
| Jan 30, 2009 | -0.71 | 4.14 | 4.85 |
| Sep 21, 2001 | -11.56 | -6.84 | 4.72 |
Source: FactSet, as of March 7, 2025. Past performance does not guarantee future results. It is not possible to invest directly in an index.
However, it’s important to highlight that what’s different about today’s macro environment renders historical parallels difficult to apply. Unlike what we’ve typically seen in the United States over the years, where fiscal spending is often in response to a recession, we’re now seeing economies that are not in recession potentially undertaking such government spending. Specifically, from an economic cycle perspective, the recent prospect of fiscal stimulus measures coming out of China and Germany appears to have sent a signal to the markets that a new, stronger global cycle may be on the horizon.
Is this market outperformance sustainable?
The global currency markets have had a significant impact on regional equity market performance year to date, with the U.S. dollar essentially getting crushed relative to many overseas currencies—but that’s only part of the story here. In our view, the sustainability of international equity outperformance going forward will also depend on the heavily weighted market sectors in the major stock indexes, most notably European financials versus U.S. technology. The latter, the biggest sector in the U.S. market at 31% of the MSCI USA Index,1 has been struggling through the first few months of 2025. At nearly 24% of the MSCI ACWI ex-USA Index,1 non-U.S. financials are the largest sector in that index and have gained 10.5% year to date,2 whereas U.S. financials are only up 1%.2
As of this writing, within the international equity space, we believe the focus should be on individual security selection with a bias toward developed markets over emerging markets. With that being said, we would be careful to not chase international equities too eagerly in the wake of their latest spurt of outperformance over U.S. stocks. At the end of the day, we believe stocks from both equity camps will find themselves more or less subject to the same global economic cycle. Accordingly, our long-term investment approach remains to invest in companies, not countries, or, said another way, stocks, not economies, wherever they may be located.
We would be careful to not chase non-U.S. equities—now more expensive—too eagerly in the wake of their latest spurt of outperformance over U.S. stocks.
1 MSCI, as of March 7, 2025. 2 FactSet, as of March 7, 2025.
Important disclosures
The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. The MSCI EAFE Index tracks the performance of large and mid-sized companies in developed markets outside the U.S. and Canada. The acronym "EAFE" stands for Europe, Australasia, and the Far East. The MSCI USA Index tracks the performance of publicly traded large- and mid-cap stocks of the U.S. market. The MSCI All Country World (MSCI ACWI) ex-USA Index tracks the performance of large and mid-sized companies across 22 of 23 developed markets countries (excluding the U.S.) and 24 emerging markets countries. With 2,056 constituents, it covers approximately 85% of the global equity opportunity set outside the U.S. It is not possible to invest directly in an index.
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