For much of the last decade, U.S. stocks dominated global markets.
From roughly 2010 through 2021, the S&P 500 significantly outpaced most developed and emerging international markets. Large U.S. technology companies drove a majority of the outperformance, and many investors began to question whether meaningful international exposure was still necessary.
But markets have a way of rotating.
For over a year now, international stocks have outperformed U.S. stocks, which is something we have not seen consistently in quite some time.
So what’s behind this shift, and what does it mean for long-term investors?
Leadership Cycles Are a Normal Occurrence in the Market
While the last decade favored U.S. markets, that hasn’t always been the case.
From 2000–2009, often referred to as the “lost decade” for U.S. stocks, international developed markets outperformed the S&P 500 by a wide margin. Emerging markets performed even more strongly during parts of that stretch.
Going further back, the 1980s saw periods where non-U.S. markets led global returns.
Market leadership has historically rotated across:
- Countries
- Sectors
- Styles (growth vs. value)
- Market capitalizations
When one region outperforms for an extended period, valuations often expand. Eventually, expectations reset, and relative performance can shift.
Valuations and Reversion Matter
At the end of the U.S. bull market run, American large-cap stocks were trading at higher price-to-earnings multiples compared to many developed international markets.
Higher valuations don’t guarantee lower returns; however, starting valuation levels have shown a meaningful relationship with forward returns over a long period of time.
International markets, in many cases, were priced more conservatively.
When economic expectations stabilize or global growth broadens, even modest earnings growth overseas can result in stronger relative returns.
This isn’t about predicting dominance. It’s about recognizing that extended valuation gaps rarely stay extreme forever.
Currency Effects Add Another Layer
For U.S.-based investors, international returns are also influenced by currency movements.
When the U.S. dollar weakens, international investments can receive an additional boost. When the dollar strengthens, it can act as a headwind.
Over long periods, currency impact tends to balance out. But in shorter stretches, it can significantly influence relative performance.
Currency cycles, like equity cycles, tend to mean revert over time.
Diversification Is Both Structural and Geographic
The U.S. market today is heavily concentrated in large-cap technology and growth-oriented companies.
International markets often have greater exposure to:
- Financial institutions
- Industrial manufacturers
- Energy and materials companies
- Dividend-oriented firms
Different economic environments favor different sectors.
When global growth broadens beyond U.S. technology dominance, international markets often participate more meaningfully.
Owning international stocks isn’t just about owning “other countries.” It’s about reducing concentration risk in any one economy or sector.
The Tax-Aware Consideration
International investing also introduces tax considerations that are often overlooked.
For example:
- International funds may generate foreign tax credits.
- Dividend yields are often higher overseas, which can affect taxable income.
- Rebalancing between U.S. and international holdings may create capital gains in taxable accounts.
This is one reason we don’t view allocation decisions in isolation.
If international markets outperform in a significant manner and/or period of time, a portfolio could become underweight to domestic equities. Disciplined rebalancing may be appropriate, but how and where you rebalance matters.
In tax-deferred accounts, adjustments may be straightforward.
In taxable accounts, thoughtful timing and gain management can help reduce unnecessary tax impact.
Investment strategy and tax strategy should work together, especially as investors approach retirement and income distribution planning becomes more important.
Avoiding the Performance-Chasing Trap
After a decade of U.S. outperformance, some investors reduced international exposure.
Now, after a stretch of international strength, the temptation may be to increase it dramatically.
History suggests neither extreme tends to work well.
From 2000–2009, investors who abandoned U.S. stocks after years of weak performance missed the strong U.S. cycle that followed.
From 2010–2021, investors who eliminated international exposure may have benefited temporarily, but also accepted greater concentration risk.
Markets reward discipline more consistently than prediction.
What This Means for Long-Term Investors
International outperformance doesn’t mean:
- The U.S. market is finished
- A major allocation shift is urgently required
- One region is structurally superior
It does reinforce why global diversification remains important.
No country leads indefinitely.
A well-constructed portfolio typically maintains exposure across U.S. and international markets, rebalancing periodically and coordinating adjustments with broader financial and tax planning goals.
Key Takeaways
If you’re reviewing your portfolio, consider:
- Whether your global allocation aligns with your long-term plan
- If extended U.S. dominance caused allocation drift
- Rebalancing thoughtfully (especially in taxable accounts)
- Coordinating investment changes with forward-looking tax projections
Market leadership rotates. Valuations adjust. Currency cycles shift.
A disciplined, globally diversified approach isn’t about chasing whichever region is currently ahead. A proper long-term investment strategy should center around building a portfolio that can adapt across full market cycles.
If you’d like to review how your portfolio is positioned globally, and how that fits within your broader retirement and tax strategy, we’re happy to walk through it together.
Matt J Black,CFP®, AAMS®
mblack@larsonfs.com
913-428-2233
Image Source: https://educationcontent.schwab.com/sites/g/files/eyrktu1071/files/Getty_1303046106_2x1.jpg?im=SmartCrop%2Cwidth%3D900%2Cheight%3D600&imwidth=1920