The Case for Global Diversification in 2026

While the U.S. stock market had a strong year, international stocks quietly had a great year. International returns nearly doubled domestic stocks, outperforming the S&P 500 for the first time in years.

For much of the last decade, U.S. investors could ignore international markets without much negative consequence. Our domestic market—led by a handful of large technology companies—seemed to be the best game in town. But 2025 may have marked a significant turning point.

If you weren't positioned for this shift in market leadership, you haven't "missed the boat." Instead, we believe we may be seeing the early stages of a multi-year cycle in which international exposure is no longer just a defensive diversification choice but also a driver of growth.

A Turning Tide for the Dollar

The most immediate reason for this rotation—and why it likely has room to run—is the changing value of the U.S. dollar. For years, a "strong dollar" acted like a headwind for international portfolios. Even when foreign companies performed well, those gains were often erased or at least reduced when converted back into dollars.

In 2025, that headwind finally turned into a tailwind. The dollar experienced its largest decline in decades, falling by ~10% against other currencies. Stated differently, international stock returns increased by ~10% more last year compared to what they would have been if the dollar had not lost value.

This shift could reflect a structural shift in global capital. As the U.S. manages an increasingly unsustainable debt trajectory, global investors can diversify their holdings away from the U.S. and into other regions.

This move would reduce over-exposure to a single currency. When investors demand fewer dollars, the currency weakens, boosting the value of your international holdings through the exchange rate.

The Great Valuation Divide

Beyond currency, another compelling reason to look abroad today is the price difference. In the U.S., the market has become incredibly concentrated. The "Magnificent 7" and other major tech names are trading at valuations that leave very little room for missed earnings.

Investors are paying a high premium today for future growth that may or may not materialize. This was evidenced in late January by Microsoft, whose stock price plunged nearly 10% in a single day after reporting Q4 results. Despite beating earnings estimates, the company's 2026 outlook failed to live up to the high expectations already baked into its price.

In contrast, international markets offer exposure to high-quality companies at a steep discount. U.S. Large-Cap Technology companies are often trading at 25x to 30x their expected earnings. Developed Market and Emerging Market companies are less expensive, frequently trading at valuations that are 12x to 15x their earnings.

This gap means that for every dollar of profit a company makes, you are paying nearly twice as much for the U.S. version as you are for its international peer. To be fair, some of this premium in the U.S. is justified by the strong growth. The big question is: can they continue to do so?

A Trend, Not a Fluke

Market leadership moves in long waves. The last decade belonged to U.S. growth stocks, but the first decade of the 2000s was dominated by international and emerging markets. After years of being "under-owned", international stocks are finally seeing large inflows of capital from investors.

Diversification can provide exposure to various markets and investing trends, but it works best if you have it in place before the trend becomes obvious to everyone. As we move through 2026, we believe the combination of a softening dollar and more reasonable valuations makes international equities an essential part of a forward-looking portfolio.

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