America’s decade-long dominance in global markets is finally showing cracks. In 2025, the MSCI All-Country World ex-US index jumped 33%, easily beating the S&P 500’s still-solid 18% gain and marking the widest gap since the financial crisis. Even more striking, that lead remains after removing currency effects, with most major international markets outperforming US stocks on underlying fundamentals alone.

The valuation wake-up: The US dollar’s decline helped international markets, but it wasn’t the main reason they pulled ahead. Valuations were the bigger driver. US stocks trade near 23x forward earnings, well above their long-term average of\~18x, while overseas markets still look meaningfully cheaper. As investors focused on that gap, capital flowed abroad, narrowing the US-global valuation spread by nearly a third by year-end — even as American stocks continue to trade at a premium.

• China led the rally, with its MSCI index up 28% — on pace to beat the S&P 500 by the widest margin since 2017, driven by sharp gains in materials, healthcare, and communication services.
• Japan’s MSCI index rose ~25% even as the yen moved roughly in line with the dollar, while South Korea and Spain surged around 100% and 60% in local-currency terms before exchange rate effects.

The Exceptionalism Trade Breaks

Goldman Sachs’ chief global equity strategist, Peter Oppenheimer, says technology stocks began moving less in unison in 2025, increasing stock-picking risk and raising the value of diversification. “What you should be doing is seeking more diversification within tech,” Oppenheimer explains. With the Magnificent Seven now accounting for more than a third of the S&P 500, concentration risk is rising — and if the AI trade cools, more investors are looking for protection outside US markets.

• Emerging markets climbed nearly 30% in 2025, aided by a weaker dollar, and strategists told Axios they remain bullish on international stocks for 2026.
• Wall Street’s 2026 outlook for US equities is mixed, ranging from Bank of America’s modest forecast of ~4% gains to Deutsche Bank’s more bullish ~17%, as high valuations cap enthusiasm.

Zooming out: Yardeni Research says it “no longer makes much sense” to overweight US stocks after backing that trade since 2010, pointing to cheaper valuations and solid earnings growth abroad. With the S&P 500 coming off three straight years of double-digit gains, history points to more muted 2026 returns near 8%, with potential drawdowns around 14%. As valuations reset, fundamentals are reclaiming their role as the driver of returns.