Are the Best International Stocks Finally Ready to Outshine U.S. Markets?

The investment landscape has been dominated by American equities for over a decade, but 2025 marked a significant turning point. International markets delivered impressive returns that challenged the reign of U.S. stock supremacy, raising an important question for investors considering the best international stocks: Is this the beginning of a sustained outperformance cycle?

Why International Markets Are Gaining Ground in 2025-2026

The performance gap has been striking. In 2025, the iShares MSCI EAFE ETF, which tracks developed international markets, returned 31.6% compared to the S&P 500’s 17.7% gain. Emerging markets fared even better, with the iShares MSCI Emerging Markets ETF delivering 34% returns. These numbers represent far more than a single year of outperformance—they signal a potential shift in market dynamics.

The drivers behind this international rally deserve closer examination. While the rotation away from U.S. technology stocks played a role, the more significant catalyst was the broader market shift from growth to value investing. As U.S. labor market indicators softened and retail sales activity declined, investors grew more cautious about bidding up expensive growth stocks. International equities, naturally positioned in value-oriented sectors, benefited from this rotation.

Currency dynamics amplified these gains. A weakening dollar against major foreign currencies provided an additional boost to international asset valuations when measured in U.S. dollar terms. This combination of sector rotation and favorable currency movement created an ideal environment for the best international stocks to gain attention.

Valuation Gap: How Best International Stocks Compare to the S&P 500

One of the most compelling reasons to examine international investment opportunities is the valuation discrepancy. The S&P 500 currently trades at a forward price-to-earnings ratio of approximately 29—historically elevated levels. In contrast, developed international markets trade at around 19 times forward earnings, while emerging markets trade at approximately 18 times earnings.

This 10-point valuation gap represents meaningful divergence. For value-conscious investors, the best international stocks offer more attractive entry prices relative to earnings potential. Historically, such valuation gaps have preceded periods where lower-priced markets catch up to premium-priced ones.

Beyond raw P/E multiples, the structural composition differs significantly. International markets maintain much lower dependency on technology stocks to drive returns. This sector diversification means international portfolios respond differently to economic cycles and market shocks—a valuable characteristic for building balanced investment strategies.

Catalysts Fueling International Market Recovery

Several fundamental factors suggest the momentum behind the best international stocks may be sustainable. Earnings growth presents a particularly compelling narrative. While 2025 saw near-stagnant earnings expansion across most European and developed markets, 2026 estimates project high single-digit to low double-digit earnings growth across developed and emerging economies.

This earnings acceleration has profound implications. Higher corporate profitability provides the fundamental justification for rising stock prices. Unlike valuations driven purely by sentiment, earnings-driven gains rest on improving business performance.

Beyond earnings, economic tailwinds are building internationally. Fiscal stimulus programs in countries like Germany, combined with productivity improvements, create conditions for accelerating growth rates overseas. A persistently weaker dollar would further enhance the attractiveness of foreign investments for U.S.-based investors.

The investment community has taken notice of these opportunities. Relative to U.S. equity ETF inflows, international and emerging markets equity ETFs have attracted new capital at nearly double the rate over the past year—a clear signal that professional investors are rotating capital toward international opportunities.

Risks That Could Derail the International Stocks Rally

Despite compelling fundamentals, investors considering the best international stocks must acknowledge meaningful risks that could reverse current momentum. Geopolitical tensions represent the most immediate concern. Global trade disputes have intensified, and any escalation in tariff policies would directly undermine growth prospects—particularly damaging given international markets’ sensitivity to trade flows.

Currency movements cut both ways. While the recent dollar weakness benefited international returns, a sustainable rebound in the dollar index would create significant headwinds, reversing the currency tailwinds that contributed to 2025’s outperformance.

Cyclical sensitivity amplifies volatility. International economies, particularly in manufacturing-dependent regions, experience amplified effects during trade slowdowns or manufacturing contractions. This heightened cyclical exposure creates asymmetric downside risk during economic disruptions.

The Investment Case: Should You Consider International Equities?

After more than a decade of American stock dominance since the financial crisis, international markets are genuinely overdue for an extended period of outperformance. The fundamental conditions finally align: valuations present material discounts to the S&P 500, earnings growth expectations exceed U.S. forecasts, and sentiment is shifting away from the “Magnificent Seven” concentration.

The case for the best international stocks rests on both cyclical and structural arguments. Cyclically, the recent rotation from growth to value plays directly into international equities’ hands. Structurally, lower valuations combined with more balanced sector diversification suggest international markets may deliver superior risk-adjusted returns.

However, execution risk remains real. International companies must deliver on earnings growth expectations. Policymakers must navigate geopolitical tensions without imposing punitive trade barriers. These conditions are not guaranteed.

For investors with a multi-year investment horizon, the risk-reward profile for international equities appears increasingly favorable. The combination of valuation discount, accelerating earnings growth, and meaningful underperformance over the past decade creates a compelling case for reconsidering international allocations. Whether 2025 marks the beginning of a new era for global diversification or merely a brief respite remains to be seen—but the opportunity for the best international stocks to deliver competitive returns appears more substantive than at any point in the recent past.