Do international stocks still earn their place?

International stocks belong in most diversified portfolios, but not for the reasons they did a decade ago. After 17 years of US dominance that made international investing look like a mistake, the case for non-US exposure has shifted from "diversification" to "reversion and valuation", a distinction that matters for how you think about allocation.

The Case That Seemed Closed (And Why It Reopened)

If you looked at performance over 2008 to 2024, you would struggle to justify international stocks. The S&P 500 index returned 10.7% annually on average, while the MSCI EAFE Index (developed markets ex-US) returned 3.3% per year, and emerging markets just 1.9% per year. The US narrative was compelling: innovation, flexible labor markets, favorable regulation, strong IP protection, and a booming tech sector. For most investors, holding only US stocks seemed rational.

But 2025 and early 2026 revealed something crucial about long cycles. In 2025, the Morningstar Global Markets ex-US Index gained 32% versus an 18% gain for the Morningstar US Market Index. One month into 2026, the trend persisted: the international index was up 6% in January, while the US counterpart rose 1.5%. This is not a one-month anomaly; it reflects deeper shifts in valuations and currency movements that suggest the long reversal may be underway.

The reason this matters: market leadership between domestic and foreign stocks follows cycles. History shows that after a 17-year run of US dominance, the timing could be opportune to consider increasing international allocations. If you were waiting for clear evidence that the cycle might turn, 2025 provided it.

Three Concrete Reasons the Argument Has Changed

Valuation Gap. This is the most striking shift. International equities are now trading near their widest discount relative to US equities on a price-to-book basis in the past 20 years. To illustrate: researchers at AQR found that from 2008 to 2022, the US outperformed EAFE by 4.7% a year, but once they controlled for valuations, the difference shrank to 1.2% (and the gap was no longer statistically significant). In other words, roughly 75% of US outperformance came from investors paying higher and higher multiples for US stocks, not from earnings growth that justified those premiums. That math typically does not persist forever.

Sector and Diversification Mismatch. A third of the Morningstar US Market Index landed in the technology sector at the end of 2025, whereas just 16% of the Morningstar Global Markets ex-US Index does. A US-only portfolio concentrates you in one bet: that large technology companies will continue to drive returns. International exposure tilts you toward financials, basic materials, and industrials, sectors that were once really big in the US market, but are less so today. This is not a guarantee of outperformance, but it is genuine diversification. When value sectors lead (as they did in 2025), international stocks naturally benefit.

Currency and Correlation Shifts. The dollar's weakness relative to other major foreign currencies was a significant factor in foreign stocks' outperformance last year. Morningstar's 2026 outlook suggests the US dollar is "likely entering a more prolonged period of cyclical weakness," though not a secular decline. Currency cycles matter. Equally important, the Morningstar Developed Markets ex-US Index had a 0.92 correlation with US stocks over the three-year period ended in 2022, but it was 0.71 at the end of 2025. Lower correlation means better diversification.

How Much International, and Which Kind?

There is no law that says you must hold international stocks, but there is a practical guide. The global market cap is a good guide to how much to hold in non-US. It has been running in the range of 60% US, 40% non-US. This reflects economic reality without forcing you to overweight or underweight.

As of March 31, 2026, the actual breakdown of the MSCI All Country World Index was 62.9% US, 27.5% developed markets ex-US, and 9.6% emerging markets. This represents home bias: the US is only about 25% of global economic output, yet occupies 63% of this global index. Investors who want to track market-cap weighting without active bets might consider a slightly higher international allocation than the ACWI offers by default.

Within international allocation, growth-leaning core and international indexes tend to have a tighter correlation with US stocks than non-US value indexes. For investors seeking genuine diversification, emphasizing value names overseas while downplaying growth appears to be a reasonable way to go. The same logic applies to emerging markets: they have generally had a lower correlation with the US equity market than developed markets, so investors seeking diversification may want to make sure their foreign-stock allocation includes at least some exposure to less-developed markets.

The Practical Framework

If you are building a portfolio and wondering how to think about international allocation, consider running your candidate allocations through MinMaxDoc's portfolio rebalancing calculator to understand the tax and trading costs of your choices, and then model how your portfolio might perform across different market scenarios using the Monte Carlo retirement simulator.

The decision is not binary. You are not choosing between "all US" and "international." You are choosing how much diversification you want, how much you believe valuations will revert, and whether you can tolerate the volatility of currency swings. Over the past 15 years, betting against international was profitable. But most international stock benchmarks have become more attractive on a valuation basis, and as cycles shift and valuation gaps revert to the mean, international equities may offer the potential to generate attractive returns over the long term.

What to Watch

US dollar trajectory. Currency moves have accounted for a large portion of international outperformance in 2025-26. If the dollar stabilizes or strengthens, international returns will slow, and that will test whether the case for international stocks holds on fundamentals alone.

Earnings growth comparisons. Watch whether US companies can continue to justify their valuation premium through earnings growth, or whether international earnings growth begins to catch up. The next two quarters of earnings reports will provide clues.

Trade policy impacts. Tariff regimes and trade tensions directly affect international sectors like basic materials, industrials, and emerging markets. Any major shifts in US trade policy could shift the relative attractiveness of international exposure.

Valuation mean reversion. Keep track of price-to-book and price-to-earnings ratios between US and international equities. A significant tightening of the valuation gap would suggest that the opportunity set has shifted again.

Disclaimer: This content is for educational and informational purposes only and does not constitute financial, investment, or tax advice. The information presented reflects the author's opinions and analysis at the time of writing and may not be suitable for your individual circumstances. Always consult with a qualified financial advisor before making investment decisions. Past performance is not indicative of future results. MinMaxDoc and its authors are not registered investment advisors.