Why International Markets are Leading in 2025

Investing in international markets offers diversification benefits that can enhance a portfolio’s risk-adjusted returns. However, not all international investments are created equal. Understanding the distinction between developed and emerging markets is crucial when evaluating global investment opportunities.

As of early 2025, international developed markets are outpacing U.S. equities, a shift that has caught the attention of investors worldwide. Let’s explore the historical context, recent performance, and factors influencing this trend, including tariff threats, currency challenges, and economic policies.

International Developed vs. Emerging Markets: Understanding the Difference

Developed Markets International consist of advanced economies with well-established financial systems, stable political environments, and high GDP per capita. These include:

• Western Europe (United Kingdom, Germany, France, Switzerland, etc.)

• Japan

• Australia

• Canada

  
  

The MSCI EAFE Index (Europe, Australasia, and the Far East) serves as a benchmark for these economies, tracking the performance of large- and mid-cap companies across developed nations outside North America.

Emerging markets, on the other hand, include economies that are still transitioning toward full industrialization and financial maturity. They typically offer higher growth potential but also higher volatility. Some key emerging markets include:

• China

• India

• Brazil

• South Africa

• Mexico

  
  

These countries often have less mature financial institutions, more economic instability, and greater exposure to political risks, making them a riskier but potentially lucrative investment.

Historical Performance: S&P 500 vs. MSCI EAFE Index

Over the past decade, U.S. stocks – represented by the S&P 500 Index – have consistently outperformed their international developed market counterparts. Several factors contributed to this:

• Technology Boom: The rise of U.S. tech giants like Apple, Microsoft, Amazon, and Nvidia fueled major gains.

• Stronger Economic Growth: The U.S. economy grew steadily, benefiting from a resilient labor market and high consumer spending.

• Monetary Policy Advantage: The Federal Reserve’s low-interest-rate policies supported stock valuations.

However, the trend is shifting in 2025, with international developed markets currently leading the way.

2025 Performance: International Developed Markets Taking the Lead

So far this year, the MSCI EAFE Index has outperformed the S&P 500, signaling a potential shift in global investment leadership.

• The Stoxx Europe 600 Index has gained about 8%, while the S&P 500 is down almost 2% (YTD through early March 2025).

• Japanese equities have also surged, fueled by corporate governance reforms and a weaker yen boosting exports.

• Attractive valuations in European and Asian markets have drawn increased investor interest.

This outperformance raises an important question: What’s driving this shift?

Why Are International Developed Markets Outperforming in 2025?

1. Valuation Gaps Favor International Stocks

U.S. stocks have become relatively expensive after years of sustained growth. Price-to-earnings (P/E) ratios for the S&P 500 remain elevated compared to those in Europe and Japan, making international developed markets more attractive for value-seeking investors.

2. Tariff Threats and Trade Uncertainty

Recent U.S. tariff threats against European and Asian imports have added new uncertainties for American corporations. Protectionist policies can create supply chain disruptions, higher input costs, and retaliatory trade measures, all of which could dampen U.S. corporate earnings.

• The Trump administration has hinted at new tariffs on European auto exports, which could escalate tensions with the EU.

• Trade disputes with China remain unresolved, causing ongoing volatility in emerging markets.

  
  

3. Currency Dynamics: The Weaker Yen and Stronger Dollar

Currency fluctuations have played a major role in 2025’s market dynamics:

• The Japanese yen has depreciated, making Japanese exports cheaper and more competitive. This has boosted corporate profits in Japan.

• The U.S. dollar remains strong, which can hurt American multinationals by making their overseas earnings less valuable when converted back into dollars.

  
  

4. Economic Policies and Corporate Reforms

Europe and Japan have implemented pro-growth policies that have made their markets more attractive:

• Germany’s increased fiscal spending is boosting industrial production and domestic demand.

• Japan’s corporate governance reforms are improving shareholder value and boosting stock prices.

These structural shifts are making international developed markets more competitive compared to the U.S.

Key Considerations for Investors

If you’re considering investing in international developed markets, here are some key points to keep in mind:

Diversification is Essential

Allocating funds across various global markets can reduce overall portfolio risk. International developed markets provide exposure to industries that may not be well-represented in the U.S., such as European luxury goods and Japanese robotics.

Valuations Matter

Investors should look at price-to-earnings (P/E) ratios and dividend yields when comparing U.S. and international stocks. Lower valuations in international developed markets could offer a better risk-reward tradeoff.

Currency Fluctuations Can Impact Returns

Investors should be mindful of currency risks. A strengthening U.S. dollar can reduce foreign investment returns, while a weakening dollar can enhance them.

Stay Informed About Global Trade Policy

Tariffs and trade disputes can impact global supply chains, affecting both U.S. and international investments. Keeping an eye on geopolitical developments is key to managing investment risk.

Final Thoughts: Should You Invest in International Developed Markets?

The recent outperformance of international developed markets suggests that investors may benefit from broadening their portfolios beyond the U.S.. While the S&P 500 has historically been a strong performer, economic trends, valuation gaps, and currency movements are making Europe and Japan increasingly attractive in 2025.

As always, investment decisions should be based on individual risk tolerance, time horizon, and financial goals. Diversifying across multiple markets can help mitigate risk and capitalize on global opportunities as economic conditions evolve.

Now might be the right time to rebalance your portfolio and explore international developed market exposure for potential long-term gains.

Talk to your financial advisor.

Source: Copyright 2025 FMeX. All rights reserved. Distributed by Financial Media Exchange.

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