U.S. stocks have outperformed international stocks since late 2011. This has frustrated those who believe you need to own both because they take turns outperforming and a global stock portfolio provides the consistent long-term returns your financial plan needs.
So, are international markets broken, or is the U.S. stock market simply exceptional?
The story most are telling is that U.S. stocks are outperforming due to superior earnings growth.
That’s helpful but doesn’t explain why U.S. corporate earnings are so much stronger, and if that’s the whole story perhaps something is wrong with international stocks and we should abandon international investing?
Well, it isn’t the whole story…
Yes, earnings growth has been stronger in the U.S. over the last 15 years (excluding Japan), but multiple expansion and currency also contributed strongly to U.S. outperformance.
Multiple Expansion
Multiple expansion means that investors paid up for U.S. stock market earnings to the point where valuations in the U.S. are 21.5 vs. 13.3 in the international markets. It’s a legit return source, but a dangerous way to make a living. Jack Bogle called it “speculative return” and explained it this way:
The price/earnings (P/E) ratio measures the number of dollars investors are willing to pay for each dollar of earnings. As investor confidence waxes and wanes, P/E multiples rise and fall. When greed holds sway, very high P/E’s are likely. When hope prevails, P/Es are moderate. When fear is in the saddle, P/Es are typically very low. Back and forth, over and over again, swings in the emotions of investors are reflected in speculative return.
The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle
Currency
Currency moves were also a factor. Granted, currency didn’t drive absolute U.S. stock market returns, but foreign currencies weakening against the U.S. dollar impacted the relative performance gap. Continued currency outperformance is not something U.S. stock investors should expect.
Going Forward
You have two choices, continue to focus on U.S. large cap or diversify globally, which still means 65% in the U.S. based on market weighting.
The former is BlackRock’s position as expressed in its 2025 Investment Outlook. They don’t believe we’re in a traditional business cycle, but a transformative economic wave (think AI and low carbon) that the U.S. stock market will benefit from given its “stronger growth and its ability to better capitalize on [these] mega forces.”
The latter is in-line with our outlook. I’ve shared recently that valuations tell you nothing about the next 12 months, so this isn’t a short-term market call. But lofty valuations driven by multiple expansion and currency moves hurting international investors shouldn’t be your long-term base case.
And unfortunately, at its core, the case for overweighting U.S. stocks is based on four words that usually don’t work out for investors: This Time is Different.
Getting back to Bogle, after explaining speculative return in his book, he explained reversion to the mean.
To be sure, stock market returns sometimes get well ahead of business fundamentals…But it has only been a matter of time until, as if drawn by a magnet, they ultimately return to the long-term norm, although often only after falling well behind for a time
The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle
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