International ETFs Have Outperformed U.S. Stocks -- but Is There More Upside Left?

Core Viewpoint - International stocks have shown outperformance relative to U.S. stocks in 2025, marking a rare shift in the trend where U.S. stocks have consistently outperformed since the financial crisis [1][3]. Market Performance - In 2025, the iShares MSCI EAFE ETF outperformed the State Street SPDR S&P 500 ETF with returns of 31.6% compared to 17.7%, while the iShares MSCI Emerging Markets ETF achieved a return of 34% [5]. Drivers of Change - The shift from growth to value investing has been a significant factor, alongside a slowdown in the U.S. labor market and declining retail sales, leading investors to seek more reasonably valued stocks [6]. - The weakening dollar has also contributed to the boost in international stocks [6]. Investor Behavior - ETF investors have increasingly favored international and emerging markets equity ETFs, which have attracted new investments at nearly double the rate of U.S. equity ETFs over the past year [7]. Valuation and Economic Factors - The S&P 500 has a forward price-to-earnings (P/E) ratio of around 29, while international developed and emerging markets stocks trade at 19 and 18 times earnings, respectively, indicating a valuation gap that presents an attractive opportunity [8]. - Economic factors such as fiscal stimulus in Germany, productivity gains, and a lower dollar could enhance growth rates for international equities [9]. - Earnings growth in 2026 is projected to be in the high single-digit to low double-digit range across developed and emerging markets, supporting the case for higher stock prices [9].