Foreign Stocks Lead 2025 Returns — But Trump’s Tariff Push Could Flip the Script
A single strategic decision — how much to allocate abroad versus at home — has defined winners and laggards in global equity portfolios so far this year. In 2025, investors who leaned into foreign markets have enjoyed clear outperformance: the Invesco International Developed ETF (IDV) is up nearly 10% YTD, and broader ex-U.S. benchmarks have outpaced the S&P 500, which sits with a modest 5% gain. But that trend is now in the crosshairs as President Trump’s intensifying trade agenda sparks real questions about how durable foreign equity leadership can be.
Until recently, the backdrop for international stocks looked highly supportive: a weaker U.S. dollar — down more than 8% this year — boosted foreign earnings in dollar terms; monetary policy stabilization abroad fueled investor risk appetite; and supply chain normalization supported export-driven economies. Emerging markets have rebounded sharply, and Europe’s large-cap multinationals have benefited from stronger capital flows.
Yet the biggest swing factor now is trade policy. Trump has moved from rhetoric to formal threats, recently notifying major partners that sweeping tariffs are imminent. Effective August 1, the U.S. will impose a 30% duty on goods from the EU and Mexico. Last week, the administration added a 35% tariff on Canadian imports — a significant escalation for a top trading partner. Tariff hikes targeting Japan and other Asian economies are set to roll out next month, unless last-minute negotiations yield relief.
For months, investors relied on what many dubbed the “TACO” trade — short for “Trump Always Chickens Out” — betting the tariff threats were just leverage for renegotiating better trade deals. But a flurry of formal letters to foreign governments and Trump’s recent comments suggest the White House may be serious about keeping protectionist measures in place, especially as election-year politics raise the stakes for showing results on reshoring and trade balance goals.
The market is already reacting. The VXUS/SPY ratio — tracking ex-U.S. equity ETF performance relative to the S&P 500 — has slipped from its early-year highs. The surge in capital flows into Europe and EM stocks is slowing, as investors recalibrate for potential earnings pressures, higher supply chain costs, and retaliatory measures that could weigh on non-U.S. exporters.
Meanwhile, the structural challenge is that Trump’s aims are not easily compatible: eliminating the trade deficit, reshoring U.S. manufacturing, and maintaining low tariffs would require a balancing act few economists see as achievable. New tariffs will likely push up input costs for U.S. firms too, but the impact could be more acute for foreign companies that depend on U.S. consumer demand and cross-border supply chains.
If tariffs do stick, investors holding overweight allocations to Europe and EM may face earnings downgrades, FX headwinds, and weaker investor sentiment. Global portfolio managers will need to watch for potential supply chain shifts as multinational corporations consider relocating capacity or passing costs to customers — moves that could reshape earnings resilience by region.
In the short term, some investors see this as a chance to rebalance portfolios toward domestic-oriented U.S. equities, especially sectors that are more insulated from trade volatility — think small-caps, utilities, and select REITs. Others believe the “TACO” script still holds: that Trump’s threats will lead to last-minute concessions, limited new trade agreements, and only modest tariff stickiness. Either way, the picture has changed.