MW Why international stocks can keep walloping U.S. investments in 2025

By Joy Wiltermuth

Global equities have outperformed U.S. stocks as diversification becomes a key theme

International stocks may be cooling off in July relative to their U.S. counterparts after a blowout first half of the year - but it's probably too soon to say the overseas party is over.

Despite the U.S. stock market's rally to fresh record highs, the dollar has struggled to mount a convincing comeback after posting its worst first half of a year since the Nixon administration.

America's inward shift during President Trump's second term - and what that means for "Ameican exceptionalism" in the markets - also matters a lot more now for investors than in recent years.

"We've certainly seen a run this year," said Ken Ryan, a portfolio manager at Parnassus Investments, which has $48 billion in assets under management, about the outperformance of international equities in 2025.

Yet Ryan worries that many U.S. investors might be "a little lazy" about their home-bias risk, give the stock market's return to record highs and two years in a row of robust 20%-plus gains.

After years of being the underdog, Ryan sees room for foreign large-cap stocks to run, given the global nature of the artificial-intelligence race and other "pro-growth" factors abroad.

Specifically, Germany and other European nations have been moving toward looser fiscal policy, while the Trump administration has been focused on tax cuts and shrinking the government. Also, instead of cutting rates like many other central banks, the Federal Reserve has been in a wait-and-see mode because of uncertainty around tariffs.

"You want to be exposed to these different trends around the world and not be too concentrated," Ryan said.

Read: Why Trump's next Fed chair may not deliver the interest-rate cuts investors expect

U.S. and beyond

Global markets have been chugging higher in 2025, in part because of Trump's push to rework America's global defense and trade alliances has led other nations to prepare for a different type of world order.

Many of the world's largest asset managers have taken notice. Aerospace and defense stocks in Europe have done particularly well since January, as have banks and shares of semiconductor companies, as the below chart from BlackRock Inc. shows.

"European commitment to spend more on defense _ and spend that money locally where possible _ should be a powerful source of earnings support," Helen Jewell, EMEA chief investment officer at BlackRockFundamental Equities, wrote in a Monday client note.

Beyond defense, she sees travel volumes that exceed prepandemic levels, but also an estimated shortage of 2,000 new airplanes since COVID shutdowns - which should mean "very strong pricing power" for large jet makers.

Additionally, Europe's semiconductor and software companies should benefit from U.S. tech industry's AI race, she added. BlackRock $(BLK.AU)$ had $12.5 trillion in assets under management in the second quarter.

Despite pulling back in July, developed-market stocks outside of the U.S. were still up 16.6% on a price-return basis this year through Friday's close, when looking at the the MSCI World ex-USA Index, according to Dow Jones Market Data.

That compared with the S&P 500 index's SPX 7.1% gain this year through Friday.

Emerging-market equities also outperformed the U.S. in the year's first six months, up 15.3%, according to Pimco.

Fund flows

The S&P 500 and Nasdaq Composite COMP pushed deeper into record territory on Monday, while the blue-chip Dow Jones Industrial Average DJIA was not far behind its December record.

This comes despite the countdown to President Trump's higher global tariffs on Aug. 1.

Pimco, in an outlook for the second half, said that the rapid snapback in U.S. stocks masks "ongoing risks and the opportunity cost of being underexposed to global markets." Pimco (XE:ALV) had $2.1 trillion in assets under management through the end of June.

While Trump has floated a 30% tariff on goods from the European Union, it doesn't feel like a "point of no return," even if that deadline for "reciprocal tariffs" comes and goes without a trade agreement, said Thierry Wizman and Gareth Berry, rates strategists at Macquarie.

"Nothing that 'happens' on Aug. 1 is necessarily permanent, so long as the U.S. administration remains willing to talk, as was indicated in Trump's letters from two weeks ago," they wrote in a Monday client note.

Another factor this year has been currencies, according to Ryan at Parnassus Investments - who noted that historically, in times when the dollar weakens, international stocks typically do quite well.

The ICE U.S. Dollar Index DXY was down 9.8% on the year through Monday, according to FactSet. The index measures the greenback against a basket of rival currencies.

What's more, investors have poured some $116.3 billion into equity funds outside of the U.S. this year, whereas only $33.6 billion flowed into U.S.-based funds dedicated to stocks, according to Winston Chua, an analyst at EPFR, part of ISI Markets.

For all of last year, $417.6 billion flowed into U.S. equity funds, almost double what flowed into funds dedicated only to international stocks, he said.

While the flows weren't at extreme levels, Chua said they do indicate a shift to international equities and away from U.S. stocks due to uncertainty around tariffs, inflation and geopolitical tensions.

Beyond equities, global bond investors also have other options beyond U.S. Treasurys BX:TMUBMUSD10Y - with longer-term rates in the U.K., Japan and Germany surging this year, according to Lawrence Gillum, chief fixed-income strategist, and Adam Turnquist, chief technical strategist, at LPL Financial.

"As such, interest rates are much higher in many non-U.S. markets, which may mean foreign investors (who make up 30% of U.S. Treasury ownership) may not be as willing to invest in U.S. Treasury securities," they wrote in an outlook on Monday.

-Joy Wiltermuth

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July 21, 2025 17:01 ET (21:01 GMT)

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