In late 2024, the "American Exceptionalism" trade was booming. Encouraged by President Donald Trump's electoral victory in November, investors from around the world poured money into the U.S. stock market.

But three months into the new year, things are looking very different. U.S. stocks have struggled during the first quarter of 2025, marred by the unwind of popular trades around artificial intelligence as well as tariff-related uncertainty. At the same time, their international rivals have zoomed ahead.

As a result, the S&P 500 SPX on Monday was on track to lag global stocks - measured by the performance of the MSCI All Country World Index ex-U.S. exchange-traded fund ACWX - by nearly 11 percentage points during the first quarter.

That would mark the strongest outperformance by international stocks on record during the first quarter of a calendar year, according to Dow Jones Market Data going back to late 1987.

To be sure, U.S. stocks have still dramatically outperformed their international rivals over the past 20 years.

Since the end of March 2005, the S&P 500 has risen by 370%, compared to less than 65% for the MSCI All Country World Index ex-U.S. ETF, Dow Jones data showed. (Both of those figures exclude dividends.)

After such a strong stretch of superior returns for the U.S., it is clear that a catch-up trade is now solidly underway.

"We're finally starting to see some reversion to the mean," said Ryan Dykmans, chief investment officer at Dunham & Assoc. Investment Counsel, during an interview with MarketWatch on Monday.

And if the past is any guide, the trend could continue for the remainder of 2025.

There aren't many examples where international stocks have beaten the U.S. by such a wide margin at the start of a year. But in the past, when it has happened, their superior gains have largely continued during the balance of the year.

Dow Jones Market Data performed an analysis of periods when international stocks surpassed the S&P 500 by 5 percentage points or more during the first quarter of a year. The data can be found in the table below.

Outside of the U.S., stocks around the world have done well during the first quarter, although there have been a few exceptions.

The STOXX Europe 600, which includes shares of companies trading in the eurozone, the U.K. and Switzerland, is on track for its strongest first-quarter outperformance versus the U.S. since 2015, Dow Jones data showed.

Meanwhile, Japan's Nikkei 225 has struggled, falling more than 10% in local-currency terms, according to FactSet data.

Where the buck stops

For foreign investors who own U.S. stocks, the market's struggles in 2025 have been particularly painful.

That is because the U.S. dollar has declined alongside equity indexes like the S&P 500. As of midday Monday, the ICE U.S. Dollar Index DXY, a measure of the buck's value compared with some of its main rivals, had fallen by about 4% so far during the first quarter, while the S&P 500 had fallen by more than 5.5%, according to FactSet data.

That's pretty unusual: The dollar and U.S. stocks haven't fallen in tandem during a calendar quarter since the first three months of 2018, FactSet data showed.

Piling on the currency weakness creates a double whammy for foreign investors. Over the past decade or so, the U.S. dollar has been so strong that many foreign investors who bought U.S. stocks opted not to hedge their currency exposure.

Now, some are worried that the longer U.S. stocks continue to struggle, the greater the risk that international investors might pull their money and opt to park it in Europe or another market - which could exacerbate losses for U.S. stocks and potentially kick off a vicious cycle.

"If the U.S. market doesn't recover, then you also have to think about all of these foreign investors," said Hardika Singh, an economic strategist at Fundstrat Global Advisors, during an interview with MarketWatch.

There was a time when U.S. stocks were primarily owned by U.S. investors. But since the start of the 21st century, foreign buyers have piled into the U.S. market. According to Federal Reserve data cited by equity strategists at Goldman Sachs, foreign ownership of U.S. stocks stood at 18% in late 2024, the highest level on record. That is up from just 7% in 2000 and 2% in 1960.

As of late last year, U.S. stocks comprised 57% of the total value of the global equity market, according to Goldman Sachs, topping the total from the peak of the dot-com bubble in 2000. Since then, their share has eased to just 54%.

Singh believes international stocks' outperformance is largely the result of a "catch-up" trade after a particularly strong stretch for U.S. equities. But she isn't convinced that this is the beginning of a lasting shift.

While Trump's tariff policies have injected more uncertainty into the outlook for markets and the U.S. economy, any economic fallout would likely be global in scope as U.S. trading partners retaliate. So if Trump's tariffs do have a deleterious impact on the economy, the suffering likely won't be limited to the U.S.

But for now, U.S. companies are still expected to see much stronger earnings growth than their global peers in 2025. This supports Fundstrat's expectation that U.S. stocks will retake the lead before the end of the year.

"It really is to the rest of the world's advantage that the U.S. continues to do well," Singh said.

The S&P 500 rose 0.6% on Monday as U.S. stocks trimmed their earlier losses. The Dow Jones Industrial Average DJIA gained 417 points, or 1%, at 42,001. The Nasdaq Composite COMP was off by 0.1% as Big Tech stocks continued to struggle.