By Eric Parnell, CFA on May 28, 2025May 28, 2025 “The lights begin to twinkle from the rocks: The long day wanes: the slow moon climbs: the deep Moans round with many voices. Come, my friends, ‘Tis not too late to seek a newer world” –Ulysses, Alfred, Lord Tennyson, 1842 For more than a decade, the U.S. stock market has resoundingly dominated its global developed international and emerging/frontier counterparts. But over the past six months since early November, the tide has turned with non-U.S. stocks surging into the lead. While such periods of relative outperformance has surfaced over the past decade only to prove fleeting, it is reasonable to consider whether this time investors will finally set sail from the U.S. stock market and venture back out more boldly across the rest of the world from a portfolio modeling perspective. uly 2 “I am part of all that I have met; Yet all experience is an arch wherethro’ Gleams that untravell’d world, whose margin fades. For ever and forever when I move.” –Ulysses, Alfred, Lord Tennyson, 1842 Experience. It is a complex decision to assertively allocate to non-U.S. markets from a portfolio modeling perspective. From a theoretical modeling perspective, a strong argument can be made for the measurable inclusion of both developed international (UK, France, Germany, Japan, etc.) and emerging markets (Brazil, India, China, Indonesia, etc.) in a broad asset allocation strategy due to their diversification characteristics (EAFE and EMF have returns correlations to the S&P 500 of +0.86 and +0.74, respectively, over the past two decades). But the decision becomes more challenging from an applied perspective for a simpler reason. End investors primarily focus on the S&P 500, thus if one allocates to non-U.S. stocks, an active portfolio bet is being taken versus the U.S. markets that everyone follows. And if these non-U.S. allocations underperform the U.S., particularly in a meaningful way as they have dating back to 2010, it raises questions as to whether taking on such risk is worth it. But just because investors have been thriving in U.S. markets for more than a decade does not mean that prior heroic returns from far-ranging markets around the world can simply be ignored. For example, consider the prior period from 2000 through early 2011 when both developed international and emerging markets trounced the U.S. for more than a decade. uly 3 Let’s take a big step further and consider the period from 1970 to 1994 (yes, effectively a quarter of a century) when non-U.S. Stocks notched a cumulative near two bagger on U.S. stocks over this extended time period. So let’s tally it up. Yes, investors have been getting it done in the U.S. for a little over the last decade, but prior to that they were relatively killing it cumulatively traveling all around the rest of the world outside of the U.S. for all but about six years (1995-2000) in the four decades (read: four oh years) prior. No wonder Ulysses was itching to get back out on the boat after ruling at home in Ithaca for so long. Glory days, am I right? “And the colors of the sea Bind your eyes with trembling mermaids And you touch the distant beaches With tales of brave Ulysses How his naked ears were tortured By the sirens sweetly singing For the sparkling waves are calling you To kiss their white laced lips” –Tales of Brave Ulysses, Cream, 1967 Sirens. So what exactly should compel investors to venture back outside of the U.S. today. After all, the bottom of the financial market ocean is littered with galleons of investors that were sucked in by the siren song of chronically cheap relative valuations for non-U.S. stocks that only became relatively cheaper, and relatively cheaper, and relatively cheaper, and . . . with each passing year. Why now? And how? First, let’s check the box. Both developed international and emerging market stocks remain at historical discounts relative to the U.S., even after the strong rally for non-U.S. versus U.S. since last November. Next, a key measure to consider is the expected future direction of the U.S. dollar. Let’s get right to the bottom line on this key point with reference to the chart below. Why have U.S. stocks performed so well relative to non-U.S. Stocks since early 2011? One has to look no further than the U.S. dollar index relative to global currencies, which strengthened by as much as 60% peak to trough over this time period. This is a MASSIVE tailwind for U.S. stocks relative to their non-U.S. counterparts, as the value of returns generated overseas have been being steadily chipped away upon repatriation back to our country for more than a decade. Not at all coincidentally, that prior period of non-U.S. outperformance relative to the U.S. came during the period from 2000 to 2011 where the U.S. dollar index weakened by more than -40% peak to trough over this previous time period. And with the U.S. dollar steadily trading more than one standard deviation above its long-term mean for the better part of four years now, the long-term path of least resistance for the U.S. dollar going forward is for weakening going forward. OK, but what might be the catalyst to not only potentially drive sustained U.S. dollar weakness relative to global currencies going forward but also provide justifiable fundamental support beyond simply valuations for non-U.S. stocks to start meaningfully outperforming the U.S. for a sustained period? For one, the U.S. Federal Reserve remains in a more flexible position versus the rest of the world to start lowering interest rates more assertively going forward. All else equal, monetary policy easing leads to a weaker domestic currency. This coupled with the fact that our global trading partners are kind of pi$$ed at us right now doesn’t inspire marginal net capital flows into the U.S. either. This coupled with growth characteristics accelerating in many parts of the developed and emerging world in ways that it previously hadn’t for years is also a big help. Another important characteristic point to emphasize is strategic approach to any such allocation. Much like the U.S. stock market as measured by the S&P 500 is a market of stocks with many different sectors, industries, and individual countries moving in their own distinct paths, the same is true of non-U.S. Investing. For example, international growth returns have more than doubled those of international value on a benchmark basis over the last 15 years, which implies avoiding allocations to the various bloated state supported banks across the world among many other things and instead focusing on the more innovative companies outside of the U.S. has provided measurable value over time. The same can be said from a country allocation perspective. Just because Japan makes up 22% of the market cap of all developed non-U.S markets according to the MSCI EAFE Index and China makes up nearly 30% of the MSCI Emerging Market Free Index does NOT AT ALL mean that a reasonable investor should simply take 22 cents on every dollar and throw it at Japan or 30 cents on every dollar and allocate it to China, particularly the latter where capital has a tradition of not being treated very well, as the better risk-adjusted return opportunities may lie elsewhere within other countries in non-U.S. markets. “It may be that the gulfs will wash us down: It may be we shall touch the Happy Isles, And see the great Achilles, whom we knew Tho’ much is taken, much abides; and though We are not now that strength which in old days Moved earth and heaven, that which we are, we are– One equal temper of heroic hearts, Made weak by time and fate, but strong in will To strive, to seek, to find, and not to yield” Ulysses, Alfred, Lord Tennyson, 1842 Bottom line. With all of this being said, it’s important to note that we as investors have been at this for a very long time. And risks remain with any potential portfolio allocation shifts at the margins, even if the underlying investment thesis is compelling. Increasing an allocation to non-U.S. stocks relative to U.S. stocks may touch the Happy Isles in the near-term, and then again the gulfs may wash us down. Thus, any such marginal change in portfolio weightings to non-U.S. relative to U.S. should be undertaken deliberately and gradually to manage against potential downside risks. But in the steadfast spirit of not yielding and consistently striving and seeking to find the most attractive potential expected return opportunities in the marketplace today, the fundamental characteristics of non-U.S. Investing relative to the U.S. continues to become increasingly compelling on the margins. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice. LPL Compliance Tracking #745437.