MW U.S. stocks are falling behind. It could be the beginning of an epic shift toward global markets.

By Joseph Adinolfi

International markets have been outperforming their American rivals recently. Investors could still be in the early innings of a years-long trend.

For years, U.S. stocks dominated global rivals. But that has started to change over the past year.

Global stocks bested major U.S. indexes like the S&P 500 by the widest margin in years in 2025. And while it is still early, it looks like they could stage a repeat performance in 2026.

Since the start of the year, major U.S. benchmarks like the S&P 500 SPX, Nasdaq Composite COMP and Dow Jones Industrial Average DJIA have trailed equity indexes in developed and emerging foreign markets.

As international stocks have powered ahead, the MSCI All Country World Index ex-USA has outperformed the S&P 500 by nearly 8 percentage points during the first 31 days of this year, according to Dow Jones Market Data. That marks the best start to a calendar year for global stocks relative to the S&P 500 going back to at least 1996.

Investors have been giving chase, pouring more money into ETFs focused on international stocks. Data from Morningstar Direct showed ETFs focused on international equities are estimated to have taken in more than $50 billion in net inflows in January - their biggest monthly haul on record going back to at least January 2000.

In the years that followed the 2008 financial crisis, the U.S. equity market outperformed practically all others. With its red-hot technology sector as the ultimate prize, foreign investors poured trillions of dollars of investment capital into U.S. stocks. But since early 2025, things have shifted into reverse.

See: How emerging-market stocks can keep trouncing the S&P 500

As a result, the price ratio between the State Street SPDR S&P 500 ETF Trust SPY and the iShares MSCI Emerging Markets ETF EEM has fallen to its lowest level since late 2023, according to Dow Jones Market Data.

To be sure, the U.S. market still has plenty to offer investors. Wall Street analysts expect earnings growth for U.S.-based firms will broaden out in 2026, which is one reason why small caps and value stocks - two areas that had lagged hot large-cap technology names over the past three years - have raced ahead in 2026.

But as value-conscious investors go hunting for bargains, many are finding more attractive opportunities abroad.

Experts say the shift could still be in its early innings. In the past, when international markets started to outperform the U.S., they continued to do so for years to come, noted Dan Boston, a portfolio manager at Polar Capital, where he is in charge of the Polar Capital International Small Company Fund.

"We feel pretty strongly about markets moving more favorably toward international," Boston told MarketWatch.

A few factors have contributed to this dynamic.

A weak dollar

Over the past year, the U.S. dollar has softened dramatically against most of its rivals. According to Boston and his team, this has been one key tailwind working in favor of international stocks.

Polar Capital analysts dug into the data and found that past periods when international equities outperformed the U.S. market also coincided with a weakening dollar.

It is difficult to understate the importance of this shift. For years, a strengthening dollar had helped to boost the returns that foreign investors could reap from investing in U.S. stocks. But over the past 12 months, the ICE U.S. Dollar Index DXY is down nearly 9%, according to FactSet data. The ICE index tracks the buck's value against a basket of rivals.

That means the dollar has gone from an unmitigated positive for international investors to yet another risk that must be hedged - and many expect the buck will continue to weaken for the foreseeable future. A BofA Global Research Rates and FX Sentiment Survey recently found that Bank of America clients were more bearish on the dollar than at any point in the survey's history, which dates back to early 2012.

Wongmo Kang, a senior investment analyst at Exome Asset Management, said this dollar pessimism is one reason why he's optimistic about international stocks, particularly emerging markets.

"Investors expect the dollar will be weakening going forward," Kang said.

Attractive valuations

In hindsight, the turn in the dollar early last year may have been the most obvious sign that international stocks were finally poised to race ahead. But it isn't the only reason why they have seen such strong relative performance lately.

Thea Jamison, a managing director at Change Global Investment, which focuses on investing in emerging and frontier markets, said investors have been drawn to international stocks' relatively attractive valuations. According to an analysis she shared with MarketWatch, the dollar's weakness accounted for less than 10% of the iShares MSCI Emerging Markets ETF's 30% return in 2025.

"Valuations are becoming a more important reference for investors," Jamison told MarketWatch. "This is really more of a long-term reallocation toward global diversification supported by valuations."

            Global index valuations - Next 12 months' price-to-earnings ratios 
   S&P 500                                                                          22.29 
   Hang Seng (Hong Kong)                                                            11.58 
   Bovespa (Brazil)                                                                 10.12 
   KOSPI Composite (South Korea)                                                     9.92 
   S&P/BMV IPC (Mexico)                                                             13.97 
   Japan Nikkei 225                                                                 21.50 
   DAX                                                                              15.39 
   Source: FactSet 

That being said, foreign stocks have looked attractive on a relative valuation basis for years; other, more immediate catalysts were needed to set this trade in motion. President Trump's decision to upend the global trading order with fresh tariffs on U.S. trading partners is one example.

Bring it on home

Another important driver is that foreign governments, including emerging markets like India and South Korea, are taking steps to make their domestic capital markets more attractive for investors.

"Many other countries formerly tied to the U.S. capital markets are now encouraging their own capital markets' growth and encouraging net investment inflows into their own countries," said Mark Mobius, a pioneering emerging-markets investor who is currently based in Dubai.

Furthermore, people living outside the U.S. tend to save a larger share of their incomes, Jamison at Change Global said. Some see this as ample dry powder that could continue to benefit foreign stocks.

Meanwhile, Trump's more transactional approach toward foreign policy has helped to inspire European nations like Germany to dramatically ramp up borrowing to spend more on defense.

Adam Phillips, head of investments at EP Wealth, said his firm's investment committee has been discussing allocating more money to foreign stocks.

"We're seeing this shift toward a more multipolar world, which we believe is still underway," Phillips said. "This is a secular change where many foreign economies are forging new relationships with trade partners that don't include the U.S."

To be sure, there is no reason yet to suspect that investment capital is leaving the U.S. According to the latest data from the Federal Reserve, the U.S. net international investment position remained heavily skewed toward domestic assets during the third quarter, the latest period for which data are available. Foreign investors still owned far more U.S. assets than U.S. investors owned in foreign assets - to the tune of about $27.6 trillion. That is the largest imbalance on record going back to at least 2006, according to data from the Federal Reserve Bank of St. Louis.

Much of this imbalance is simply a reflection of the fact that the U.S. is a net debtor to the rest of the world - meaning U.S. debt is widely owned by foreign investors, both central banks and private firms. But the massive appreciation in U.S. stock prices over the past decade has also played a role.

"This chart is indicative of what's going to happen when the shift finally comes," Change Global's Jamison said. "This is why we think we're not at the start of a five-year or a six-year cycle - we're at the start of a cycle that will take me through the rest of my career."

-Joseph Adinolfi

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

(END) Dow Jones Newswires

February 18, 2026 15:48 ET (20:48 GMT)

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