Over the past 35 years, U.S. equities have outperformed their international peers by an impressive 4.7% per year.
A recent article by asset manager AQR argues that the strong historical performance of U.S. stocks has encouraged many investors to overweight the U.S.โprecisely when a shift toward international markets may be more prudent.
www.aqr.com/Insights/Research/White-Papers/Exceptional-Expectations-US-vs-Non-US-Equities
AQR makes the following points:
1. The U.S. outperformance was mostly due to rising valuations rather than superior earnings growth. By the end of 2024, the U.S. was trading at nearly twice the valuation of non-U.S. developed markets.
2. To justify current prices, U.S. companies would need to grow earnings more than 2% faster per year than their non-U.S. peers over the next decade. Thatโs a high bar.
3. Long-term return forecasts now favour non-U.S. markets by a wide margin. The valuation gap is historically extreme, and even modest mean reversion could shift performance leadership.
4. The first signs of mean reversion may already be playing out. From January to April 2025, U.S. equities experienced a 7% relative derating vs. the rest of the world.
I remain overweight non-U.S. markets, particularly Europe, where valuations remain compelling and expectations more reasonable. In my view, non-U.S. equities have more room to outperform, especially if the U.S. dollar weakens further, as many anticipate.
https://x.com/TaviCosta/status/1925991545343246508
andreassteno.substack.com/p/steno-signals-198-a-2025-weaker-usd
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