Over the last couple of decades, the U.S. equities have substantially outperformed foreign markets. So the question is: Why invest in foreign markets when you get your best results here at home? The answer lies in looking at performance over a longer term; including foreign stocks in your portfolio improves diversification and expected returns, and lowers your overall risk.
In recent years we’ve seen that a handful of U.S. stocks, mostly technology stocks, have been responsible for the U.S. market outperforming most other markets. But in many lengthy periods in the past, foreign stocks have outperformed U.S. equities. For example, from 2000 to 2009, the so-called “lost decade,” U.S. stocks saw little or no growth.
Being diversified with foreign stocks helps you avoid lost decades.
Protection in a time of uncertainty
In 2025, foreign stocks have been performing better than their U.S. counterparts, primarily due to the uncertainty surrounding U.S. fiscal and monetary policies, highlighted by on-again off-again tariff declarations. As U.S. equities have struggled, foreign markets have posted impressive gains. Through June 13:
- The MSCI EAFE Index (representing Europe, Australasia, and the Far East) is up 18 percent year-to-date, its best start in 25 years.
- Emerging market stocks have risen approximately 12 percent.
- The ACWI ex-US Index, which represents about 85 percent of global equity markets outside the U.S., has gained about 16 percent.
- Meanwhile, the S&P 500 was up just a little more than 2 percent.
What’s driving the divergence?
Several factors are contributing to foreign markets’ performance:
- While U.S. tariff policies are viewed as potentially hindering economic growth, other countries are implementing growth-supportive measures. For example, in contrast to the U.S. Federal Reserve’s cautious stance on rate cuts, the European Central Bank has cut interest rates multiple times in 2025, bringing borrowing costs to their lowest level since late 2022.
- Expectations for greater defense spending in Europe have given Europe’s industrial sector a particularly big boost, which has been fueled by double-digit gains in aerospace and defense stocks.
- Stocks are generally cheaper overseas relative to those in the U.S. Despite recent market corrections, U.S. equity valuations remain elevated by historical standards. These valuation advantages provide some cushion against economic headwinds and potentially offer more upside if global growth proves more resilient than expected.
- Late in 2024, stock prices surged much faster than the companies’ underlying earnings. The implication was that earnings needed to accelerate to catch up with the price of stocks, or stock prices were likely to come down. The 2025 market correction has largely brought stock prices more in line with earnings expectations.
Pushbacks to investing in foreign stocks
Despite market factors, investors can be hesitant to commit their dollars to foreign companies. One pushback concerns the makeup of companies in Europe versus the U.S. The U.S. equities market contains more technology companies, which means greater innovation, which is why the U.S. market has outperformed others. But how much longer will that last? Markets move in cycles, and the technology brands that drive the U.S. market could become over-valued or otherwise be out of favor. Also, in times of economic recovery, industrials typically do best, and a lot of the European markets are skewed toward industrial companies.
Another pushback: Why not just buy U.S. multinational companies where a large portion of their revenue comes from overseas? But a U.S. seller overseas operates under substantially different and typically more stringent rules and regulations than a home-country business. You don’t get the full benefit of diversification through U.S. multinationals.
We’re not suggesting investors should “time the market” and shift your focus to foreign stocks. We’re saying that because no one can predict how or when the cycles will occur, having a healthy allocation overseas ensures you are there when it does happen. Typically we recommend a 30 percent allocation to foreign stocks, including emerging market stocks, which offer more opportunity for growth but are more volatile so assigned a lower allocation.
Moreover, We design our strategies with moments like this in mind. By maintaining well-constructed, diversified portfolios that include appropriate allocations to domestic and international equities, fixed income, and potentially alternative investments, investors can position themselves to navigate the current uncertainty while remaining aligned with their long-term financial objectives.
Investment Strategy Implications
Based on ongoing market analysis, we believe the following strategic considerations remain key for investors:
- Maintain international exposure.
The recent outperformance of international markets validates the importance of global diversification. Our most recent experience demonstrates the value of having foreign investments, and we believe they will continue to add value going forward.
- Consider fixed income opportunities.
Despite past periods of underperformance, bonds have demonstrated their diversification value through the recent equity market volatility. Because current yields are a bit higher than they have been for a number of years and economic growth is expected to slow, a core bond strategy is likely to do fairly well in the months and years ahead.
- Explore alternative investments.
We believe in including private equity and private credit in our client’s portfolios. Both provide an opportunity to not only increase your expected return over time but also lower the overall volatility of your portfolio. However, such allocations require appropriate risk and liquidity profiles, making them suitable for some investors but not all.
- Avoid reactive decision-making.
Almost universally, when we’ve seen an investor dramatically changing their long-term strategic allocation due to recent market volatility, it’s been the wrong decision.
Conclusion
The current market environment presents both challenges and opportunities for investors. While U.S. markets have experienced volatility and underperformance relative to international indices, historical patterns suggest that patient investors who maintain diversified portfolios are likely to weather the turbulence successfully.
The divergence between U.S. and foreign markets highlights the enduring value of international diversification, while the relationship between earnings and stock prices provides context for understanding recent market corrections. Most importantly, the risks of market timing demonstrated by missing even a few key trading days emphasize the importance of maintaining strategic allocations through periods of uncertainty.
By maintaining well-constructed, diversified portfolios that include appropriate allocations to domestic and international equities, fixed income, and potentially alternative investments, investors can position themselves to navigate the current uncertainty while remaining aligned with their long-term financial objectives.
Ready to review your portfolio’s resilience in today’s volatile market? Schedule a consultation with one of HBKS Wealth Advisors’ experienced financial professionals to ensure your investment strategy is positioned to weather uncertainty and benefit from opportunities. Contact us today to discuss your long-term financial goals.
Important Disclosure:
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
HBKS Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
The historical and current information as to rules, laws, guidelines, or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified but was obtained from sources believed to be reliable. HBKS Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
Investment Advisory Services offered through HBK Sorce Advisory LLC, d.b.a. HBKS Wealth Advisors. Not FDIC Insured – Not Bank Guaranteed – May Lose Value, Including Loss of Principal – Not Insured By Any State or Federal Agency.
