By Paul R. La Monica

That didn't last long.

The postelection euphoria in the U.S. stock market has faded since Inauguration Day, with the S&P 500 index now flat for the year through Friday morning trading. Adding insult to injury, U.S. stocks have lagged behind major European and Asian equity indexes so far in 2025 as hopes for deregulation and lower taxes from President Donald Trump have faded and been replaced by worries about tariffs, layoffs, and other factors. His goal might be to make America great again, but for investors, at least, his policies have unleashed an international comeback.

"The American exceptionalism narrative may have been overdone," says Angelo Kourkafas, a senior global investment strategist at Edward Jones, adding that after a strong year for the U.S. stock market in 2024 and relatively weaker performance for the rest of the world, "the pendulum went too far on selling international equities."

It may only be getting started for U.S. stocks. The S&P 500 has fallen 2.5% this week, while the Nasdaq Composite tumbled 5.2%. The Dow Jones Industrial Average escaped relatively unchanged.

The case against continued U.S. dominance found more evidence this week as well, starting with the unwinding of the artificial-intelligence trade. Nvidia stock dropped 8.5% on Thursday despite solid earnings, suggesting that the market had gotten too excited about its prospects and those of the rest of the Magnificent Seven. Now it feels like investors with even passive index exposure to the market have been left with an unhealthy level of tech stocks riding the AI wave.

"Global diversification might be worthwhile," says Andreas Utermann, chairman of Vontobel. He notes that the MSCI World Index now has 75% of its exposure to U.S. equities. "That looks toppy," he says, pointing out that it's more typical for American stocks to make up about half of the index.

Economic concerns are also creeping in. Inflation remains a worry -- the personal consumption expenditures price index, the Federal Reserve's favored measure, matched forecasts for a 2.5% year-over year increase in January -- while consumer confidence slid in February. Investors will be paying close attention to manufacturing and job market reports during the first week of March for further signs of macro weakness -- and more evidence that investors should expand their horizons.

It doesn't hurt that international stocks are cheap. The Stoxx Europe 600 index trades for less than 15 times this year's earnings estimates, compared with a multiple of 22 for the S&P 500. There are some compelling fundamental reasons for the resurgence of non-U.S. stocks, too. Mike Dickson, head of research at Horizon Investments, pointed to hopes for an end to the Russia-Ukraine war and the emergence of DeepSeek, China's cheaper AI technology, as reasons non-U.S. stocks are catching up. "International allocations that sometimes dampen performance when the U.S. leads the pack can help stabilize portfolio returns in more balanced market environments," Dickson said in a report.

Even international bonds have started to show signs of life. The iShares International Aggregate Bond and Vanguard Total International Bond exchange-traded funds have returned nearly 1% this year and both offer trailing yields above 4%, though they have lagged behind the 2.2% return for the iShares Core U.S. Aggregate Bond ETF. Investors should probably have about 30% of bond investments in international securities, according to Rebecca Venter, senior product manager for fixed income at Vanguard. "There are lots of pockets of the global bond market with good fundamentals," she says. European corporate bonds, much like European stocks, trade for better values, Venter notes.

None of this is to suggest it's time to dump U.S. assets wholesale. Earnings growth for the so-called S&P 493 have picked up steam, and the recent drop in yields has led to a boost in total returns for Treasury bonds. But investors who thought that America was the only game in town have gotten a wake-up call.

Time to bust out your passports.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 28, 2025 10:59 ET (15:59 GMT)

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