Don’t bet on America alone

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  By Guest Blogger Sinan Terzioglu

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Since the end of the Global Financial Crisis in mid-2009, the US equity market has achieved an average annual return of over 14%, significantly outpacing the rest of the world, which collectively achieved an average annual return of less than 7%.

So far in 2025, international equity markets are outperforming the US equity market leading some to wonder whether international equities might finally end the 16-year streak of US outperformance—the longest in history—or if this trend is merely temporary.

A client recently asked:

Should we consider selling my international equities given their recent strength and increase my allocation to US equities? The US market is the most innovative in the world, and I believe this trend will continue for many years. You’ve frequently emphasized the strong fundamentals and earnings growth of the largest US companies in the S&P 500.

Given this, why should we invest in markets with comparatively weaker fundamentals? It seems that focusing primarily on the US market might yield higher total returns over the long term for my portfolio. Moreover, with S&P 500 companies generating around 40% of their revenue from international markets, isn’t that already providing sufficient international diversification?

Good question. The US market appears to have it all and now accounts for approximately 60% of the world’s total market capitalization, up from 40% in 2010 and not far off from 53% in 2000.

Although the US market has the strongest fundamentals, its current valuations are considerably higher than historical averages. Given the above-average return on equity for the largest S&P 500 companies, these valuations might be justified. However, when expectations are high and results don’t meet investors’ expectations, valuations may contract leading to disappointing investment returns. Therefore, strong fundamentals alone don’t always translate to strong returns, making it very important to manage risks and diversify.

The long-term performance of the US equity market over the next 20+ years will likely be close to it’s historical average. However, there will likely be years when the US market significantly underperforms compared to international markets. Historically, US and international markets have moved in cycles, as illustrated in this chart.

How US and international stocks match up

Source: Hartford Funds

While some may argue that long-term returns are what truly matter, the real challenge for most investors is staying invested during negative years. Many investors struggle with annual losses, and enduring 3-5+ years of negative annualized performance in the equity portion of a portfolio can be particularly challenging. This often leads to emotional decisions and abandoning long-term investment plans. By diversifying investments across various markets, investors can mitigate the impact of poor performance in any single market and ensure they remain invested to capture the long-term rate of return.

Investing globally enhances sector diversification, which has varied significantly in the US market over the past few decades. Currently, one-third of the US market is concentrated in the technology sector. Although the US market is home to many innovative companies, technological advancements can happen rapidly, and new innovators can emerge globally, as demonstrated by the recent rise of DeepSeek, a Chinese artificial intelligence company. By diversifying internationally, investors can access a broader range of sectors worldwide, including vital sectors like energy and materials, which are less prominent in the US equity market.

Although US multinationals generate a substantial portion of their revenues from international markets, they lack exposure to certain regions, particularly some emerging markets. Global diversification provides access to growth opportunities in these emerging markets, which have significant growth potential due to their expanding economies and increasing consumer bases. By investing globally, investors can tap into these opportunities and benefit from the growth of companies outside the US.

Global diversification ensures you own the next big winners, which can emerge from anywhere in the world. Hendrik Bessembinder, a professor of finance at Arizona State University, conducted a research study analyzing long-term shareholder returns for over 64,000 global common stocks from January 1990 to December 2020. His findings revealed that the top-performing 2.40% of firms around the world accounted for all of the US$75.7 trillion in net global stock market wealth creation during this period. Outside the US, 1.41% of firms were responsible for US$30.7 trillion in net wealth creation.

In summary, maintaining a globally diversified portfolio is essential for reducing risk, sticking to a disciplined long-term investment strategy, and capturing growth opportunities. This approach helps investors avoid pitfalls like recency bias and emotional decision-making, which can erode returns, while ensuring sustainable long-term gains in a constantly evolving world.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

Source: https://www.greaterfool.ca/2025/03/12/dont-bet-on-america-alone/