For most of the sixteen years since the Great Financial Crisis, betting on U.S. stocks over international ones was, with hindsight, simply the correct call. That pattern has broken — decisively — over the past two years, and the size of the reversal is worth understanding on its own terms.
The Scale of the Reversal
In 2025, international stocks outperformed U.S. equities by their largest margin in more than 30 years. Morningstar's broad benchmark for stocks outside the U.S. gained 32% in dollar terms that year, against 17% for its U.S. counterpart — a 15-percentage-point gap. That trend has persisted into 2026: as of mid-year, the Vanguard Total International Stock ETF (VXUS) was up more than 9% year to date, while the Vanguard Total Stock Market ETF (VTI) was up just over 2%. Over the trailing 12 months, VXUS gained roughly 31%, compared with about 12% for the S&P 500 and 11.7% for the Nasdaq-100. Emerging markets specifically have been even stronger: the iShares Core MSCI Emerging Markets ETF (IEMG) is up roughly 11% year to date, and emerging-market stocks broadly gained 42-43% over the trailing 12 months.
Why It's Happening
A handful of specific, identifiable factors are cited consistently across independent research. First, U.S. dollar weakness: the dollar fell more than 9% in 2025 and has continued declining roughly 1.5% further in 2026. For U.S.-based investors, a weaker dollar provides a direct, mechanical boost to foreign equity returns, since gains in euros, yen, or emerging-market currencies translate into more dollars upon conversion. Second, valuation: despite the recent rally, international markets still trade at a discount to U.S. stocks, even though that gap has narrowed from its extremes. Third, sector composition: American tariff policy and aggressive interest-rate cuts in some regions and countries have specifically benefited areas like European banking stocks and Latin American mining (tied to the gold and copper price surge), sectors that are underrepresented in U.S. indexes relative to technology.
The Money Is Already Moving
This shift shows up clearly in fund flows, not just index returns. Over the trailing year, investors poured roughly $29 billion into VXUS and another roughly $28 billion into IEMG. In just the first eight weeks of 2026 alone, investors added $32 billion to U.S.-listed emerging-market equity ETFs, with single-country funds tracking South Korea and Brazil recording especially strong demand — a sign that flows are becoming more targeted and specific rather than simply broad "everything outside the U.S." bets.
The Case Against Chasing It
Not every serious analyst agrees this trend continues, and the counter-argument deserves equal weight. Fidelity's Denise Chisholm has argued 2025 was "anomalous" and that U.S. earnings growth, tax cuts, falling rates, and lower oil prices set up American stocks to lead again — her framing is blunt: "international looks like a value trap." Her data point is specific: looking sector-by-sector rather than at the index level, the median U.S. company has grown earnings faster than its international counterparts, and that gap has widened, not narrowed, over recent cycles. Her broader argument is about starting valuation: historically, when international stocks were cheapest relative to the U.S. (as they've generally been for most of the last decade), they've actually had lower odds of subsequent outperformance than when they started from a more expensive relative valuation — a genuinely counterintuitive finding that complicates the simple "it's cheap, so it should outperform" logic.
What This Means for a Diversified Portfolio
The most useful framing here isn't picking a side in the "U.S. versus international" debate — it's recognizing that the debate itself is genuinely live again, which wasn't really true for most of the past decade. Vanguard's own 10-year forward return projections illustrate the stakes: the firm projects 4.9%-6.9% average annual returns for ex-U.S. equities over the next decade, against 4%-5% for U.S. equities — a meaningful, if uncertain, projected gap. Whether or not that specific forecast proves accurate, the broader point stands: a portfolio concentrated entirely in U.S. stocks is making an active, not neutral, bet that U.S. outperformance resumes — a bet that looked automatically correct for over a decade and looks considerably less automatic today. This connects directly to the core diversification principle covered in our guide on how diversification can reduce portfolio risk: spreading exposure across geographies, not just asset classes, is itself a form of risk management against exactly this kind of multi-year regime shift.
