By Patti Domm

Investors concerned about a weakening dollar have been diversifying out of the U.S. and into other developed markets over the past year. That is looking like an even wiser play as investors seek new ways to insulate their portfolios from the shakeout in AI-related equities in the U.S.

When tech stocks perform well, U.S. indexes tend to outperform other developed markets. But international markets have broadly beat the S&P 500 over the past year and are expected to continue to do so. The iShares Core MSCI International Developed Markets ETF, which is based on an index of stocks from developed markets but excludes the U.S., is up 35% in the past 12 months. The S&P 500 gained 18% in that period.

"Now that we are seeing a broader distribution of growth opportunities emerge, we are seeing generally all of the other markets starting to perform a bit better," said Gina Martin Adams, chief market strategist at HB Wealth Advisors.

Japanese stocks, for instance, have risen nearly 17% this year on optimism about the Japanese government's fiscal stimulus policies. Europe has seen improving corporate profits, relatively cheap stock valuations, and tailwinds from increased defense and other government spending.

"There is a bigger story to be told about broad global equity markets producing better returns on a combination of valuation expansion and earnings growth," Adams said.

A common theme in developed markets over the past year is an active effort to reduce reliance on the U.S., according to Henry Mallari-D'Auria, chief investment officer of global and emerging markets equities at Ariel Investments. Their reaction to President Donald Trump's tariffs and his push for European allies to increase their defense spending has created opportunities for investors.

Earlier in Trump's second term, an easy diversification play was to invest in European defense companies. But another investment strategy, focused on other sectors expected to outperform the U.S. due to fresh capital investment, is emerging, Mallari-D'Auria said.

European companies that had previously been diversifying away from the continent are now being incentivized to spend money in their home markets. To encourage capital spending, European regulators have been allowing higher returns for providers of some key regulated industries, such as energy and telecommunications.

"That is good for corporate profits and corporate stock prices," Mallari-D'Auria said. "With the U.S. dollar likely to continue to weaken, it isn't out of the question for a 20% type of return for U.S. investors in Europe."

Among the telecom stocks he likes are United Kingdom's BT Group and France's Orange SA. He also likes the German steel company Salzgitter AG and the German chemical company Wacker Chemie AG.

Stock markets in Canada and Australia, both heavily driven by commodities, also offer opportunity. Ian McKinnon, chief investment officer of Montreal-based Addenda Capital, said Canada's S&P/TSX Composite could gain 10% this year. About a third of that index consists of natural resources companies, including energy and commodities like uranium, copper, and gold.

"That is where we see a very favorable demand-supply dynamic," McKinnon said.

With gold now more than $5,100 an ounce, Canadian gold miners could appreciate significantly. Canada is home to some of the world's leading gold producers, including Agnico Eagle and Barrick.

The iShares MSCI Canada ETF is up nearly 7% so far this year and is 41% higher over the past 12 months. The ETF is based on the MSCI Canada Index.

Japan's stock market performance has also been an upside surprise as of late. The Nikkei 225, which is up about 53% over the past year, has been rising on expectations that fiscal spending will help boost growth and corporate profits. A recent election gave Japanese Prime Minister Sanae Takaichi a strong majority in parliament, which could provide political stability and support for her growth-focused spending and tax cuts. At the same time, Japanese regulators and the Tokyo Stock Exchange are pushing companies to improve corporate governance and transparency.

"There is real reform going on in Japan," said Darlene Pasquill, head of the equity division at Mizuho Americas.

Japanese companies are focused on optimizing balance sheets and growth strategies, Pasquill said. They have reduced non-core holdings and increased buybacks and dividends. She thinks the Nikkei indexes can go higher.

The structural shift in Japan from deflation to inflation is also helping lift stocks, as is the move by Japanese households to shift from cash into other assets, she added. iShares MSCI Japan ETF is up 14% so far this year.

Developed markets aren't without risk. For Japan, rising inflation means the Bank of Japan is in a rate hiking cycle. Its government bond yields have been moving higher. With a debt-to-GDP ratio of more than 200%, yields could keep rising, posing potential risk to stocks.

Geopolitical tensions can quickly turn negative for any market, as they did for European stocks earlier this year when Trump made threats against Greenland, a territory of Denmark. But as AI-related stocks tumble, it is becoming hard to ignore the potential upside from diversifying outside the states. It isn't a Sell America trade; it's more like "buy the whole world."

Write to editors@barrons.com.

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February 26, 2026 11:12 ET (16:12 GMT)

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