By Telis Demos
Global diversification was a winner for American investors in 2025. Why?
Usually the answer to why one investment did better than another is simple: It went up more, or down less. The MSCI all-country world ex-U.S. index covers 85% of the equity opportunity set outside the U.S. The iShares exchange-traded fund that tracks it returned about 33% in 2025 to a U.S. investor. The S&P 500, meanwhile, returned around 18%.
But when it comes to investing outside of one's home market, there are two important components to a return. There is how much that asset went up in its own local currency and how that currency did compared with the U.S. dollar. Stocks in other currencies become more valuable as the dollar falls in value, which boosts returns in dollar terms -- and, of course, vice versa.
The MSCI return referenced above is in dollar terms. That means that investors benefitted not only from whatever those markets did on their own, but also from the fact that the dollar was down about 9% in 2025 compared with a basket of other currencies, according to FactSet data.
Dollar worries definitely dominated the headlines in 2025 with "de-dollarization" entering the mainstream lexicon. Worries over the U.S. fiscal path and its political volatility helped power not just foreign stocks, but also gold and crypto.
But the dollar's slide hardly explained everything about non-U.S. stocks' performance. Global equity strategists at Goldman Sachs, who had recommended global diversification for investors in 2025, broke down the individual performance of several major national indexes by four factors: earnings growth, valuation multiple, dividends and currency adjustments.
From that breakdown, all but one of them -- France's CAC 40 -- would have beaten the S&P 500's return through mid-December even without the dollar's slide against that market's local currency.
The MSCI Japan index returned around 25% in 2025 to a U.S.-dollar based investor, even though the yen basically kept pace with the dollar during the year. The benchmark for South Korea returned about 100% on a dollar basis. In Europe, the euro gained sharply against the dollar -- but even without that, Spain's index still returned more than 60% in euro terms.
What was powering big markets outside the U.S.? According to a Goldman Sachs breakdown, a common driver was a sharp increase in valuations, or how much each yen, pound or euro of earnings was valued at in the market.
Consider the price-earnings-growth ratio, a measure of valuation that adjusts for earnings growth. Over the course of 2025 through mid-December, the gap between U.S. and rest-of-world PEG ratios narrowed by almost a third, according to figures tracked by Goldman Sachs strategists. Still, as of mid-December, the U.S. premium was still more than twice as large as the average since 2005, Goldman's figures show.
Some expect further normalization. Yardeni Research said in a recent note that "it no longer makes much sense" to continue recommending that clients "overweight" the U.S. in a global stocks portfolio, as it has done since 2010. The firm noted how non-U.S. stocks are still cheaper on a forward price-to-earnings basis, and also cited the "resilience" of corporate earnings globally.
"It's a big world with many countries having large populations that aspire to a better standard of living. Globalization isn't dead," Yardeni Research wrote.
This analysis should give comfort to investors who naturally worry if the same global diversification strategy can work again in 2026.
Diversification comes in many forms. For instance, while it is true that banks and financial companies are the largest sector for the MSCI all-country ex-U.S. benchmark, the top five individual stocks are all tech plays: Taiwan Semiconductor Manufacturing, the Netherlands' ASML, China's Alibaba and Tencent, and Korea's Samsung Electronics.
Does this mean international stocks fail to diversify an investor away from the tech heavy U.S. market? Not necessarily. Goldman's chief global equity strategist and head of macro research in Europe, Peter Oppenheimer, notes that technology stocks themselves started to move less in unison in 2025. This effectively means that attempting to pick winners is riskier than in the past, because you have a higher chance of picking a loser.
"What you should be doing is seeking more diversification within tech," says Oppenheimer.
In 2026, perhaps the dollar, or foreign earnings, or U.S. valuations, will do something different. But will they all turn at once? The advantages of global diversification are, well, diverse.
Write to Telis Demos at Telis.Demos@wsj.com
(END) Dow Jones Newswires
January 02, 2026 05:30 ET (10:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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