Why the World Is Outpacing Wall Street?

Archive edition · Market data and company circumstances reflect 11 October 2025, when this newsletter was sent.

What’s Powering International Stocks?

For more than a decade, international equities have played second fiddle to the United States, home to the Magnificent 7 and the most powerful technology ecosystem in history. The dominance of American tech made it hard for the rest of the world to keep up. But 2025 may mark a structural turning point.

After years of lagging, non-U.S. markets are finally showing signs of life. Fueled by a weaker dollar, targeted fiscal stimulus in Europe and Asia, and surging demand across industrial, defense, and financial sectors, global equities are regaining relevance.

This time, the rebound isn’t just a short-term trade, it is built on improving fundamentals and policy shifts that could sustain a multi-year rerating.

Ex-U.S. Markets Take Control

After years of underperformance, ex-U.S. equities have staged an impressive rally in 2025, outpacing U.S. benchmarks through the first nine months of the year.

What’s driving this resurgence?

In other words, the post-pandemic “U.S. only” narrative is finally cracking.

While the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla) still dominate headlines, ex-U.S. markets are quietly pulling away. Total returns through August 2025 show the MSCI Europe and MSCI ACWI ex-U.S. indices leading global peers for the first time in nearly 15 years.

It’s not just performance. Forward valuations for international stocks are now supported by genuine earnings recovery, signaling that this time the rally could have staying power.

• Germany’s massive fiscal stimulus program, the largest in its post-war history, has revitalized European industrial demand.
• Energy costs have declined sharply from the post-Ukraine war surge, giving manufacturers room to breathe.
• A broad policy pivot toward economic self-sufficiency is redirecting investment into local innovation and infrastructure.
• A weakening U.S. dollar is boosting foreign returns for U.S. investors.

The Dollar Drops, The World Rises

Currency cycles have always been powerful drivers of international equity returns. And 2025 has been no exception.

The U.S. dollar has weakened sharply, down 12% versus the euro, 7% versus the British pound, and 6% versus the Japanese yen year-to-date. Historically, such broad dollar declines have triggered outperformance in international equities, especially for U.S.-based investors whose foreign holdings benefit when converted back into dollars.

Currency effects have contributed nearly half of 2025’s total return for MSCI Europe and MSCI EAFE.

This trend is consistent with decades of market history: Periods of sustained dollar weakness typically coincide with extended global equity bull runs. The reason is straightforward: Capital flows become more globally diversified as the dollar loses its relative appeal, encouraging international investment.

If this dollar downcycle continues, it could provide a powerful tailwind for ex-U.S. equities through 2026 and beyond, particularly in export-heavy economies such as Germany, Japan, and South Korea.

The Earnings Engine Restarts

Perhaps the strongest signal of a durable rebound lies in the earnings outlook.

For years, international corporate profits trailed the U.S., largely because the U.S. tech sector captured disproportionate growth. But the earnings gap is narrowing fast.

According to FactSet data, European companies are now projected to grow earnings at rates nearly equal to their U.S. counterparts:

The shift is striking: Europe’s three-year forward earnings CAGR (11.5%) now rivals the S&P 500’s 12.1%, signaling a broad-based recovery in corporate profitability.

The Real Leaders of the 2025 Rally

Three sectors stand out as the new growth engines for global equities: banks, aerospace, and defense.

European banks have quietly staged a remarkable recovery. Since the European Central Bank ended its negative interest rate policy in mid-2022, net interest margins have expanded significantly.

Loan losses remain contained, capital ratios are strong, and dividend payouts are rising after years of regulatory constraints. As a result, European banks have outperformed both the S&P 500 Banks Index and even the Mag 7 since August 2024.

Return on equity (ROE) for major European banks now exceeds 12%, compared to roughly 10% for U.S. peers. With balance sheets fortified and valuations still undemanding, this may be one of the most compelling contrarian opportunities in global markets.

The commercial aerospace sector is benefiting from powerful structural forces, many of which are likely to persist through the next decade. After years of underproduction during the pandemic, global airlines face a massive backlog of aircraft orders. Supply remains tight, demand is surging, and manufacturers have regained pricing power.

At the same time, geopolitical tensions and a renewed focus on defense spending are driving dual-use investments in aerospace technology. Margins and cash flows are expanding, and analysts expect sustained double-digit growth across European and U.S. aerospace firms well into 2027.

Following years of underinvestment, NATO members have pledged to boost military spending from 2% of GDP to 5% by 2035. This represents a seismic policy shift, especially for European economies that had relied heavily on U.S. security guarantees.

While fiscal constraints will moderate near-term outlays, the direction of travel is clear: Defense budgets are expanding, benefiting aerospace primes, component suppliers, and advanced electronics manufacturers across Europe and Asia.

The combination of normalized interest rates, strong bank capital, industrial renaissance, and rising defense budgets forms the most coordinated set of global tailwinds seen in over a decade.

Stocks Rise, But Value Remains

One of the strongest and most enduring arguments for owning international equities remains valuation.

Even after a solid year of performance, ex-U.S. markets continue to trade at meaningful discounts compared with their U.S. peers.

These multiples remain below their own 10-year averages and represent roughly a 35% discount to the U.S., according to data from Capital Group and FactSet.

Beyond valuation, international markets feature greater exposure to cyclical and industrial sectors such as heavy industry, energy, materials, and chemicals, areas well positioned to benefit from rising global infrastructure investment and reindustrialization trends.

Historically, whenever valuation gaps between U.S. and international equities have reached these extremes, the subsequent decade has tended to favor ex-U.S. markets.

• MSCI ACWI ex-USA Index: 14.6× forward earnings
• MSCI EAFE Index: 15.1×
• S&P 500 Index: 22.8×

Portfolio Implications for Investors

For investors who have been heavily concentrated in U.S. equities, diversification now looks timely and strategic.

Long-term allocators may find this an opportune moment to rebalance portfolios for the next cycle of global growth.

• Consider increasing exposure to international developed markets, particularly Europe and Japan, where fiscal and earnings tailwinds are aligning.
• Look for value in sectors tied to reindustrialization, energy transition, and defense modernization.
• Use currency hedges selectively, as dollar weakness remains an active theme.
• Blend quality and dividend yield, since ex-U.S. markets often offer both at attractive valuations.

Archive note

This article preserves the analysis in our weekly newsletter sent 11 October 2025. Market prices, forecasts and company circumstances reflect the time of publication and may have changed.

This material is general information, not personal financial advice or a recommendation to trade. Investing and trading involve risk, including loss of capital.