Foreign Stocks Have Outpaced U.S. Equities in 2025, But Momentum Shows Signs of Fading — Evening Brief – 09.15.25
Global equities ex-U.S. remain among 2025’s standout performers, with the Vanguard Total International ETF (VXUS) up 24.1% year-to-date, more than double the 11.6% return of the SPDR S&P 500 ETF (SPY). Several forces have driven this divergence: the weaker U.S. dollar in the first quarter enhanced foreign equity returns for dollar-based investors, while valuation discounts—with many developed-market stocks trading at 30–40% lower forward P/E multiples than their U.S. counterparts—attracted flows. Additionally, earnings momentum has picked up in Europe and Asia, particularly in export-oriented sectors, industrials, and technology hardware.
Still, momentum appears to be shifting. Since mid-April, the VXUS:SPY performance ratio has rolled over, with U.S. equities reclaiming leadership. This raises the possibility that the surge in foreign equities was more cyclical than structural. Historical precedent supports caution: in past decades, international equities have periodically outperformed but struggled to sustain leadership, with U.S. stocks benefiting from higher productivity growth, deeper capital markets, and the enduring strength of the technology sector.
The recent stabilization of the VXUS:SPY ratio suggests two possible scenarios: either global shares are consolidating gains before another leg higher, or the market has reached an inflection point where U.S. equities resume dominance. Longer-term analysis points to the latter, with history showing that rallies in offshore equities often prove temporary. Thus, while 2025’s international outperformance is impressive, it may represent short-term noise rather than a durable secular shift in equity leadership.
That said, investors should note that even if the broad international trend weakens relative to U.S. stocks, there is still room for regional and country-specific markets to generate meaningful outperformance, particularly in areas benefiting from structural reforms, supply-chain realignment, or policy-driven growth.