International Markets

Estimated reading time: 5 minutes

Study Abroad

The conversation around investment opportunities abroad has picked up over recent weeks, and deservedly so. A quick glance at major equity indices around the globe shows us that many are outperforming the S&P 500 year-to-date (YTD), and by a wide margin. 

In the interest of blog brevity, we’ll focus on two main areas in this piece: Europe and China. But that doesn’t negate the fact that there are also other countries with strong relative returns this year such as Mexico, Brazil, and South Korea to name a few.

On a YTD basis, the S&P 500 is only up 4.2%, the Nasdaq is up 3.8%, and the Dow is up 4.7%. That’s actually quite healthy considering we’re only about two months into this year, but it pales in comparison to what European and Chinese markets have put up YTD.

It’s worth noting that this is a very short time period of outperformance compared to the past 17 years of European and Chinese stock underperformance and there have been false starts before. 

The question investors have to ask themselves is the same one we’ve been asking about the U.S. economy for a few years: Is this time different?

Deciding to Buy

There are many things that go into a decision to invest in something, some of which are specific to each investor such as risk tolerance, time horizon, liquidity needs, and tax implications. Other things to consider are more specific to that investment such as its current valuation level, the economic and business environment, its exposure to certain sectors/themes/regions, all of which can inform an investor’s expectations for future returns.

It’s well known that the U.S. economy is in better shape than most economies around the globe as shown in our labor market strength, healthy consumer spending, and decent business activity across multiple sectors. We look at earnings growth, the U.S. is still expected to outpace Europe and China for the next 12 months.

So why then, would investors consider allocating money to other regions if the major fundamentals still suggest the U.S. is stronger? Additionally, why have these regions done so well compared to the U.S. so far this year?

1. The earnings chart above is shown in U.S. dollar (USD) terms, and given the strength of the USD since late summer 2024, other currencies have weakened by comparison and pushed down relative earnings expectations. If there should be a reversal in USD strength – which there actually has been since mid-January – these earnings figures could change. 
2. Toward the end of last year as markets were trying to anticipate the policies of a new U.S. administration, a decent amount of skepticism and worry was priced into European and Chinese equity markets. So far this year, the tariff bark has been bigger than the bite, and these regions may be going through a relief rally to reprice their markets for a less painful Trump policy agenda than originally thought.
3. China has shown a willingness to stimulate its flailing economy and we believe it will continue to do so until things are in a more stable state. We wouldn’t bet against a Chinese government that’s committed to meeting its growth targets and maintaining its place in the world as a competitive economy.
4. Despite Europe’s economic woes, if there is a de-escalation in the Russia/Ukraine situation that opens it back up to Russian energy, the economies of many European countries could benefit. There is also a case to be made for an increase in European government spending as a result of potentially less U.S. funding support.

Cost Matters

A final element that can make Europe and China attractive right now is valuations. It’s no secret that U.S. stock indices are trading at high valuations compared to history, with investors getting more critical of the price they’re paying. Europe and China offer more compelling valuation levels according to their price-to-earnings (P/E) ratios versus the U.S.

Valuations are not a good timing mechanism, but they tend to be a solid tool in setting expectations for future returns. More specifically, the higher the valuation compared to history, the lower the future expected return. As investors search for attractive opportunities, valuations are playing a large role in the evaluation process. 

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