International equities: A diverse opportunity set beyond the U.S.

Coming off a standout year, international equities are approaching the middle of 2026 in an unfamiliar position relative to U.S. stocks. In 2025, the MSCI ACWI ex USA Index delivered its strongest annual return since 2009, gaining 33% compared to a roughly 18% increase for the S&P 500^® Index.¹ That momentum extended into this year, with international stocks strong out of the gate and still ahead of their U.S. peers year to date (as of this writing). For context, the last time the ex-U.S. benchmark outpaced the broader U.S. equity market in consecutive calendar years was 2007.

This comes despite a challenging investment backdrop marked by rising geopolitical tensions, uncertainty around global trade, and war in the Middle East. The closure of the Strait of Hormuz and the related energy shock have reignited inflation concerns, clouded the outlook for global growth, and complicated the policy picture for central banks.

While the path forward is unlikely to be a straight line, we believe last year’s strong performance should not be viewed as an aberration. A closer look at monthly returns over the past five years reveals that international stocks outperformed their U.S. peers in 29 of 60 months, even amid a long stretch of U.S. market leadership, suggesting that relative performance has been more nuanced than headline index returns might imply.

In our view, that pattern highlights the potential role international equities can play as a counterbalance to U.S. exposure.

International markets feature more balanced sector exposures

Part of the explanation lies in differences in market composition. Whereas the U.S. benchmark has become heavily concentrated in mega-cap tech and growth-oriented sectors, markets outside the U.S. offer a more varied and balanced mix of exposures. They also provide access to different sources of earnings growth, including companies tied to long-term secular trends – in some cases at more attractive valuations than their U.S.-listed peers.

As shown in the chart below, Information Technology and Communication Services currently account for nearly half of the S&P 500’s market capitalization. Notably, under current Global Industry Classification Standard (GICS^®) classifications, “Big Tech” giants Meta and Google-parent Alphabet sit within the Communication Services sector rather than Information Technology. By contrast, the MSCI ACWI ex USA Index is more balanced across growth- and value-oriented sectors.

Finding opportunities in overseas markets

With higher weightings in Financials, Industrials, Materials, Utilities, and select technology firms that lie downstream from AI infrastructure spending, we believe international markets offer fertile ground for identifying leading companies poised to benefit from a range of secular trends that we see supporting fundamentals over the long term. Several areas we find particularly compelling include:

• European banks: Improved profitability, stronger capital positions, and still-modest valuations continue to support the case for European banks, in our view. As global realignment pushes Europe to focus more intently on domestic growth, competitiveness, and supply-chain resilience, banks are likely to play a key role in providing capital to the real economy. These firms also have more diversified earnings streams than when return on equity (ROE) last reached comparable levels more than 15 years ago, while prospects for banking-sector deregulation could further support loan growth.
• Defense stocks: The strained relationship between the U.S. and longtime NATO allies has reinforced Europe’s need to take greater responsibility for its own security. After decades of underinvestment, we believe the scale and duration of Europe’s rearmament cycle remain underappreciated, with structural drivers in place to support multi-year earnings growth. Some leading European firms also stand to benefit from increased U.S. defense spending. In our view, companies with differentiated capabilities, localized manufacturing footprints, and long-term contract visibility are best positioned as budgets translate into orders and earnings growth.
• Ex-U.S. technology: Unlike the U.S., where software firms comprise a large share of the technology sector, overseas markets are disproportionately weighted toward the “picks and shovel makers” at the heart of the AI infrastructure buildout. This includes many of the most critical semiconductor, memory, and equipment suppliers, with leading firms based in Taiwan, South Korea, Japan, and the Netherlands. These companies have been direct beneficiaries of the increased capital spending from hyperscalers, and in some cases trade at more attractive valuations than their U.S. peers.

We also see opportunities in areas such as batteries and power storage, where data center growth, AI-related demand for compute, and broader electrification are driving long-term demand for power infrastructure and storage solutions. Meanwhile, the energy shock from the Middle East conflict has further reinforced the importance of energy security, with net-importing countries likely to place greater emphasis on renewables-plus-battery storage and other alternatives.

Elsewhere, we see a dislocation between valuations and fundamentals creating compelling opportunities for select luxury consumer stocks. We believe the market is underappreciating the durability of these high-value franchises, setting up the potential for both stronger-than-anticipated earnings growth and multiple expansion over time.

Furthermore, while U.S. market leadership may be understandable in the context of technological innovation, deep capital markets, and earnings growth, the data supports our view that international markets offer an attractive hunting ground for opportunities that may not yet be as widely appreciated.

Over the past decade, despite U.S. companies accounting for nearly two-thirds of the MSCI ACWI Index – primarily due to outsized Big Tech representation – a disproportionate number of top-performing stocks in the benchmark have been found outside the United States. In our view, an overly narrow focus on U.S. equities risks overlooking high-quality businesses with compelling long‑term fundamentals.

Top-performing stocks over the past decade have been concentrated outside the U.S.
Domicile of top 100 performing stocks (%), MSCI ACWI IndexSource: MSCI, Janus Henderson Investors. Data from 31 December 2014 to 31 December 2025. The MSCI ACWI Index captures large- and mid-cap representation across 23 developed markets and 24 emerging markets countries. Past performance is no guarantee of future results.                           

Finally, while valuations have risen following last year’s strong performance, international stocks continue to trade at a meaningful discount relative to U.S. equities.

• As of this writing, the MSCI ex USA Index has a forward price-to-earnings (P/E) ratio of 14.1, modestly above its 20-year average of 13.2.
• By comparison, the S&P 500 trades at 20.9 times forward earnings, or roughly 27% above its long-term average of 16.5.²

In our view, the combination of lower relative valuations, broader sector exposure, and underappreciated company fundamentals creates an attractive environment for active stock selection.

Risk considerations

While we remain positive on the long-term fundamentals supporting international equities, the macroeconomic environment remains unsettled. In the months ahead, countries more exposed to energy and supply chain disruptions stemming from the Middle East conflict will be contending with the dual threat of rising inflation and potential knock-on effects to demand and the outlook for growth, making selectivity all the more critical.

That said, volatility can create opportunities for discerning investors. In our view, the diversity of geographies, demographics, policy regimes, and industry exposures across international markets, combined with meaningfully greater dispersion in returns than in U.S. equities, creates a favorable environment for bottom‑up stock selection informed by deep fundamental research and regional expertise.

Against this backdrop, we believe international equities can continue to play an important role as a counterweight to U.S. equity exposure. In our view, investors are likely to be rewarded for maintaining a disciplined approach focused on companies with differentiated capabilities and durable free cash flow growth that is not yet fully appreciated by the market.

IMPORTANT INFORMATION

Aerospace and defense industries can be significantly affected by changes in the economy, fuel prices, labor relations, and government regulation and spending.

Actively managed investment portfolios are subject to the risk that the investment strategies and research process employed may fail to produce the intended results. Accordingly, a portfolio may underperform its benchmark index or other investment products with similar investment objectives.

Artificial intelligence (“AI”) focused companies, including those that develop or utilize AI technologies, may face rapid product obsolescence, intense competition, and increased regulatory scrutiny. These companies often rely heavily on intellectual property, invest significantly in research and development, and depend on maintaining and growing consumer demand. Their securities may be more volatile than those of companies offering more established technologies and may be affected by risks tied to the use of AI in business operations, including legal liability or reputational harm.

Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.

Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.

Financials industries can be significantly affected by extensive government regulation, subject to relatively rapid change due to increasingly blurred distinctions between service segments, and significantly affected by availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition.

Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.

Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.