2. Changes in Fiscal Spending: The US employed expansionary fiscal policy after COVID-19, including roughly $1 trillion in funding from the Inflation Reduction Act. Outside the US, meanwhile, austerity was the prevailing policy during the same time frame. However, we’ve begun to see a reversal of that trend.

In the US, much of the spending associated with the Inflation Reduction Act has already happened, and there’s some question as to whether pledged-but-not-yet-allocated funding will occur. Couple that with the highly publicized roll-out of the Department of Government Efficiency and its heavy, targeted cuts to spending, and the fiscal outlook for the US is projected to be contractionary relative to recent levels.

By contrast, the fiscal spending outlook elsewhere looks to be on the upswing: High-profile estimates for spending pledges on infrastructure and defense are in the $1.5 trillion range in Europe. The bulk of this proposed spending has come from Germany as part of significant changes to the debt-spending philosophy of the world’s third-largest economy.

3. Tariff Perceptions: Given the emphasis on tariffs during President Donald Trump’s campaign, their April roll-out shouldn’t have been much of a surprise. Nevertheless, the sudden and unclear implementation seems to have been what caught markets off guard.

The US market’s volatility in response to tariff news supported a belief that foreign companies could be less impacted by tariffs than their domestic competitors. While companies worldwide have developed global supply chains over decades, foreign firms have the potential to shift their output to destinations outside the US to avoid some of the tariff impacts. Domestic producers, however, might find it harder to shift the impact of tariffs if they rely on foreign-sourced components to any extent. This could lead to domestic producers having to absorb the added cost, pass the costs on to consumers (with associated demand destruction), or some combination of the two.

4. Increased Focus on Shareholder Returns: As a means of encouraging both domestic and foreign investment in Japanese equities, the Tokyo Stock Exchange instituted reforms in 2023 aimed at improving corporate governance. These reforms encouraged firms to focus on improving their price-to-book ratios (which for many companies on the exchange were below 1.0), as well as an increased emphasis on improving shareholder returns. These reforms have had a positive impact thus far, not only in terms of increased share buybacks and dividends, but also through rising share prices.

On the heels of this program’s success in Japan, exchange operators in South Korea enacted a similar program in 2024, while further reforms were announced earlier this year. Though the positive results there haven’t yet materialized, it’s still relatively early.

5. Valuation Gaps: Pundits have been beating the drum for valuation gaps as the justification for “why international” for years. And while their assertion was correct—valuation gaps were at noteworthy levels relative to history—the unfortunate reality is that it hasn’t been unusual for international equities to trade at a discount to their US peers (FIGURE 2).
 

Though we don’t necessarily see this valuation gap alone as a catalyst for international equities to outperform, its breadth leaves plenty of room for international-equity valuations to become richer while still remaining cheap relative to US markets. 

Even with their recent performance advantage, international markets continue to be attractively valued relative to US equities. Through May 31, 2025, the MSCI ACWI ex USA Index was trading at a roughly 35% discount to the S&P 500 Index. 

These five trends might just be the catalysts we’ve been waiting for to spur outperformance from international equities.  

The bottom line: For years, we’ve been reminded of the diversification benefits brought by allocating to international equities, with hopes that mean reversion could drive returns due to cheap valuations. What we’ve seen is that those low valuations have been a prerequisite, but weren’t enough to generate competitive relative returns alone. However, these five trends might just be the catalysts we’ve been waiting for to spur outperformance from international equities.