American stocks are underperforming international equities at their widest margin since the great financial crisis.
Why it matters: Investors are looking to increase their exposure outside of the U.S. amid policy uncertainty under the Trump administration and heightened fears over high valuations and an AI bubble.
What they're saying: "I would be quite happy to invest abroad— in developed country equities, broadly in emerging markets— just to try and rebalance a portfolio," David Kelly, chief global strategist at JPMorgan asset management, tells Axios.
- For Kelly, investing abroad is as much about getting away from lofty valuations as it is about obtaining exposure to international growth opportunities.
- When you compare U.S. stock valuations with a wide set of international counterparts, "one of these numbers is not like the others," he says. "The thing that stands out is how expensive the U.S. is."
By the numbers: The S&P 500 is up about 17% year to date, trading at nearly 23 times forward earnings. The historic average is 18 times.
- The MSCI ex-US index, a basket of international stocks that excludes American companies, is up 29% in the same period.
- Emerging markets are up nearly 30%, helped by a weaker dollar.
State of play: Before 2025, the U.S. had outperformed international stocks over the last decade plus. Here's why that's changing:
- Valuations. U.S. equities — especially tech — look expensive compared with overseas markets.
- Trade uncertainty. The lingering effects of President Trump's tariff blitz have raised concerns about U.S. companies being able to maintain earnings growth.
- AI bubble. The Magnificent 7 stocks that have driven an AI rally account for more than a third of the S&P 500 index. If those stocks were to stumble, leading to a bursting of the bubble, investors will want protection, and they're getting that by increasing their investments outside the U.S.
Zoom in: It's not just about protection from the AI bubble. It's also about exposure to Asia, where companies like China's DeepSeek are proving formidable competitors to the American tech giants.
- Asia is a leader among international stocks, with MSCI China up 29% and Hong Kong's Hang Seng up nearly 28%.
Between the lines: China's large language models are "as good as anything the U.S. has that's been proven by independent testing," notes Jay Pelosky, founder at TPW Advisory. "China has a much better hand than people give it credit for."
- Pelosky has been consistently bullish on China because of its focus on building out its own competitive tech stack and its AI push, as well as its focus on growth and reflation as a potential earnings boost.
- JPMorgan flipped to an overweight position in China, citing those signs of economic recovery.
What we're watching: Whether the outperformance of international stocks continues.
- Of the dozen-plus strategists who Axios interviewed about 2026 outlooks, all of them maintain a bullish view on stocks outside the U.S. for 2026.
- The question is whether the Big Tech names making investors flee the U.S. will be the thing keeping them here if the AI rally keeps roaring for much longer.
