By Randall Smith
After trailing U.S. stock markets since the global financial crisis of 2008-09, overseas stocks have recently begun to outperform. The question for investors: How much of their portfolio should be international?
Many investors give this little thought because news coverage tends to focus on the big U.S. indexes like the Dow Jones Industrial Average, the S&P 500 and the Nasdaq composite. What's more, for the past 15 years or so, U.S. investors did better focusing on domestic stocks.
"Clients have been asking us how they should rethink their non-U.S. portfolios," says Gargi Chauduri, a portfolio strategist at BlackRock. "A lot of people have not really thought about this in the past few years."
Here's why: Between 2010 and 2024, U.S. stocks returned about 13.5% annually, compared with 4.8% for international stocks, based on the largest total-market index funds in each category, according to Morningstar Direct. But in the first six months of this year -- a period marked by the springtime tariff turmoil -- non-U.S. have returned 18.2%, well ahead of the 5.6% gain for U.S. issues.
U.S. stocks trade at a current multiple of 23 times expected future earnings, a healthy premium to non-U.S. stocks at 14 times, based on market prices as of July 2, according to Yardeni Research.
Why U.S. stocks have dominated
Drew Pettit, a market strategist at Citigroup, says the valuation gap is a product of different earnings growth rates, with U.S. corporate earnings growing at 9% annually over the past five years, and non-U.S. corporate earnings growing at 4% in developed markets and just 1% in emerging markets.
Reasons for the big 15-year performance gap include a rise in the value of the dollar against foreign currencies and U.S. dominance in high-growth areas such as tech and telecom, including over the past two years with "Magnificent Seven" stocks such as Google parent Alphabet, Facebook parent Meta Platforms, Microsoft and Nvidia.
Europe hasn't been producing Magnificent Seven-type companies because the U.S. early-stage capital markets are more vibrant, allowing such companies to get funding when they are still losing money, Pettit says.
Looking ahead over the next five years, Pettit sees U.S. earnings growth decelerating and non-U.S. developed markets improving to annual growth rates of 6% to 7%. One reason for that is "you do have a little bit of a regime change in Europe where they're moving from fiscal austerity to stimulus," while "the U.S. is going the other way, starting to be more concerned about debt."
Whether or not this year's trend continues, many experts say it makes sense for individuals to have a chunk of their stocks overseas for diversification to smooth out returns.
How much to allocate
Big money managers tend to recommend that individual investors hold non-U.S. stocks in some rough proportion close to the stocks' 35% share of global markets. One way to think about "how much" is this: Less than 15% to 20% might be too small a percentage to make much of a difference, and more than 45% to 50% and you're verging on making an outsize bet that smacks of market timing.
In mid-April, Citi upgraded non-U.S. stocks, advising clients to cut back on exposure on U.S. equities to a neutral 65% portfolio weighting, in line with their share of global market capitalization.
Among target-date fund sponsors, Fidelity Investments ranks near the top with a benchmark 40% non-U.S. stock allocation, which is currently boosted to 45% based partly on lower valuations and earnings expectations among overseas companies.
But Putnam Investments allocates just 20% to international stocks, at the low end, believing that their diversification benefits have been weakened because both U.S. and non-U.S. stock markets have been moving more in tandem in recent decades. Some firms like Putnam reduce the non-U.S. percentage as retirement nears, to reduce risk.
Rick Ferri, a financial adviser in San Saba, Texas, says U.S. investors should put 30% to 40% of their stocks overseas. "There's no magic formula," he adds.
Not all pros put international stocks in their own nest eggs. Edward Yardeni, a veteran market strategist, doesn't hold any non-U.S. stocks personally because, he says, "America still does excel in a lot of areas. We have the world's biggest, most liquid capital markets, lots of resources, plenty of energy, with relatively free-market capitalism." (His own firm doesn't go that far, recommending only that non-U.S. stocks get a small, or underweight, allocation.)
How to go global
One easy way for index-fund investors to get non-U.S. exposure is with a global index fund that includes both U.S. and non-U.S. issues, says Elisabeth Kashner, director of global funds research at FactSet. The largest of those are Vanguard Total World Stock Index fund (ticker: VTWAX) and BlackRock's iShares MSCI ACWI exchange-traded fund $(ACWI)$.
For those who already own U.S. stock funds and want to add international shares, Vanguard and BlackRock also offer index funds that slice the overseas markets into developed and emerging sectors, and that combine the two as well.
The largest active non-U.S. stock mutual funds are from Capital Group, which sponsors American Funds EUPAC Fund (AEPGX) and American Funds New World Fund (NEWFX). The next two largest are Dodge & Cox International Stock Fund (DODFX) and Goldman Sachs GQG Partners International Opportunities Institutional Fund (GSIMX).
As for individual stocks, Alexis Deladerrière, deputy chief investment officer of fundamental equities at Goldman Sachs Asset Management and manager of the Goldman Sachs International Equity Income fund (GSIKX), recommends three European companies -- Schneider Electric of France and Iberdrola of Spain, which both help develop and power data centers needed for the growth of artificial intelligence, and Siemens of Germany for its factory robotics business.
Peter J. Klein, founder of investment adviser Aline Wealth, said the valuation discount outside the U.S. is "a margin of safety that's hard to ignore." Klein said his firm has found good value among international healthcare stocks. The largest of those include AstraZeneca, Sanofi, GSK and BioNTech.
Kim DeDominicis, a target-date portfolio manager at T. Rowe Price, says another area where valuations are improving is in European banks. For the first time in seven years, their price-to-book value ratio has climbed above 1 times. By comparison, U.S. banks currently trade at 1.5 times book value.
Randall Smith, a former financial reporter for The Wall Street Journal, is a writer in New York. He can be reached at reports@wsj.com.
(END) Dow Jones Newswires
July 04, 2025 09:00 ET (13:00 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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